As I’ve been noting in this column since the beginning of the year, there is a major economic disconnect between what is happening on Wall Street and what is happening on Main Street. Eventually, the great divide will come into focus and the U.S. economy will react accordingly.
The evidence: if the stock market is a leading indicator of economic health, then the U.S. is running full steam ahead. The current bull market is now in its fifth year. The S&P 500 is up more than 18% since December 31, 2012 and the Dow Jones Industrial Average is up almost 20% since the end of 2012; both are trading near record highs.
If the life of the average American is the litmus test for America’s economic health, then things are not as rosy as they would appear. U.S. unemployment remains high at 7.5%; median income levels are down 8.1% from their 2007 levels; the number of Americans relying on food stamps has soared 80% to 47.5 million (or 23 million households) since 2007; wages are stagnant; and 40% of Americans have at least one credit card with a balance of close to $15,800.
This economic reality is being reflected in the 2013 first-quarter and second-quarter financial results. During the first quarter of 2013, 78% of the so-called red-hot S&P 500 companies issued negative earnings-per-share (EPS) guidance. For the second quarter, almost 80% of S&P 500 companies have issued a negative outlook.
Sure, the S&P 500 may be reporting strong returns, but it’s not because of an economic recovery. The current bull market has more to do with the Federal Reserve’s … Read More
Even with some better economic news, it’s very important that investors not lose sight of the fact that the stock market is due for a massive correction.
The run-up since the beginning of the year is pronounced, but the stock market has basically been going up since the March 2009 low.
Corporate earnings are still being reported and, for the most part, the first quarter of 2013 was pretty decent.
It was very evident that revenues were light, but earnings at many companies beat consensus. What the numbers also revealed was a pronounced increase in cash balances at many brand-name companies. The financial health of U.S. corporations is getting better.
But with these fundamentals, the U.S. economy still has a long way to go in its recovery, and it’s important to view the stock market as a leading indicator that represents bets by institutional investors.
Institutional investors are paid to play. When they take in money, it has to go to work, because that’s what customers are paying for.
Corporations are also playing their role in this rising stock market. They’ve been very good at managing their earnings and satisfying what shareholders want—that is, earnings maintenance in a slow-growth environment, increasing share buybacks, and rising dividends.
What I gathered from first-quarter earnings season is that many corporations expect the bottom half of the year to be stronger.
It’s my view that institutional investors are betting on this expectation, because they have cash inflows that need to be put to work.
I’m actually quite surprised the stock market has not corrected already. Like earnings, the flow of economic news has some … Read More
In a rare miss for a consumer products business, The Clorox Company (NYSE/CLX) disappointed the stock market by reporting very flat first-quarter numbers.
It’s more evidence that real economic growth continues to be elusive.
The Clorox Company is a really good business.
It’s way more than “Clorox Bleach:” it’s also “Pine-Sol,” “Liquid-Plumr,” “S.O.S.,” “Glad,” “Burt’s Bees,” “Brita,” and “Kingsford,” to name a few.
According to the company, it could only generate a one-percent gain in sales, to $1.41 billion.
Diluted earnings per share from continuing operations fell two percent from the comparable quarter.
The company’s domestic U.S. business was stronger than international operations. One sore spot for the company was its “Kingsford” charcoal brand, because of the weather; a stronger winter kept charcoal consumers indoors.
There’s also been a strong movement towards more environmentally friendly cleaning products. Plenty of consumer product brands purport to be “green,” and they line the store shelves at many retailers.
Noticeable in the company’s earnings report was a significant increase in cash and equivalents. This is a trend that is prevalent throughout the entire stock market.
Clorox’s 10-year stock chart is below:
Chart courtesy of www.StockCharts.com
The company’s long-term stock market performance has been excellent.
Clorox announced third-quarter earnings of $134 million, or $1.00 diluted earnings per share. This compares with $134 million, or $1.02 diluted earnings per share, in the same quarter last year.
Like many consumer goods companies, Clorox recently soared on the stock market. While it should be considered fully valued considering its flat earnings, Clorox is still offering a three-percent dividend yield. This is what has kept institutional investors in the … Read More
If there is good news to be had, it is that corporations are increasing their dividends.
The unprecedented amounts of cash floating through the economic system have fostered an unfortunate environment in which corporations don’t need to make substantial new investments in their operations.
While this creates a more positive environment for investors, Main Street is left out, twisting in the wind.
Among the many blue-chip corporations that recently announced substantial increases to their dividends, there are three stocks worth taking a look at:
1. PepsiCo, Inc. (NYSE/PEP)
PepsiCo is an unbelievably good business and a very good stock market holding if you’re a long-term investor.
The company’s first-quarter earnings results were excellent, and it was very evident that an increase in dividends was going to happen, because the company’s cash balances soared.
PepsiCo announced an increase of six percent in its annual dividends to $2.27, from $2.15 per share. This is the company’s 41st consecutive annual dividend increase.
2. Costco Wholesale Corporation (NASDAQ/COST)
Costco is a super cash machine.
On the stock market, the position has doubled over the last three years, which is impressive for such a large, mature, and low-margin business.
This corporation is consistently increasing its dividends.
Company management recently announced a quarterly dividend increase from $0.275 to $0.31 a share, or from $1.10 to $1.24 per share on an annualized basis, for a 12.7% gain.
3. International Business Machines Corporation (NYSE/IBM)
This technology bellwether reported first-quarter earnings just shy of expectations. Still, investors continue to buy this stock because the business is solid and the company is increasing its dividends.
International Business Machines (IBM) raised … Read More
Very soon, the stock market will be overbought. It’s time to be extremely cautious.
Even in the face of mixed earnings and economic news, institutional investors keep buying this market. And while fundamentals don’t particularly support a rising stock market, there are a number of reasons why institutions have to buy. Here are just three of the reasons:
1. They Have the Money
There is a tremendous amount of cash sitting on the sidelines. Both individual and institutional investors have been very frazzled over the last few years, and corporations have, as well.
Earnings results from large mutual funds and investment corporations recently revealed billions of dollars of new cash inflows allocated to equities. That money has to be put to work, because that’s what customers are paying for.
2. There Is Nowhere Else to Go
Because interest rates are so artificially low, there is no other asset class, other than real estate, where investors can allocate their capital and expect to get a return that is greater than the rate of inflation.
Even if the stock market doesn’t do anything and corporations don’t show any growth in earnings, dividend payments and share buybacks are very well assured.
Institutional investors need to invest in this stock market, because bonds, currencies, and commodities no longer offer the right combination of income, safety, and prospective capital gains. This is why so many blue chips have been outperforming—they offer what the rest of the world does not.
3. They Have to Keep Up with the Joneses
Without a doubt, a herd mentality exists on Wall Street. Investment companies have been chasing the safest … Read More
If corporate earnings are coming in as expected and first-quarter revenues are light, the one thing that is very noticeable is the continuing improvement in balance sheets.
Cash and cash equivalents continue to see increases, and shareholders’ equity is going up. The result of all this continues to be corporations becoming highly reticent to invest in new operations.
As is the case every earnings season, new stock market buyback programs are announced, dividends are increased, and corporations give corporate outlooks that are fairly unspecific. Many corporations reported that they expect business conditions to improve in the bottom half of the year, which is a bit of a cop-out.
No company wants to risk a major earnings flop, and the fourth quarter of 2013 is still just too far off.
One thing that surprised me so far this earnings season is that I really would have thought that share prices would’ve sold off more after reporting. The lack of selling off, which is quite typical in an earnings season, is indicative of a stock market that continues to have positive institutional investor interest.
The stock market already went up tremendously before earnings season began. I think this is a real sign that institutional investors think that this market can go quite a bit higher.
But it is important to the trading action that the stock market does take a meaningful break. Valuations aren’t stretched by any means, but the lack of revenue growth is a problem.
Very few of the large brand-name corporations reduced their full-year outlooks so far this earnings season—this is a good sign. But still, growth expectations are … Read More
Revenues are coming in light, but earnings are holding up.
Now that it’s the heart of earnings season, it’s a good time to reevaluate portfolios for risk.
There is still a lot that could go wrong in this market, and there is no help from the rest of the world in terms of economic growth.
Also evidenced by this earnings season is the continuing buildup corporations have in terms of cash. What this signals to me is that corporations are still very nervous about making major new investments, which is holding the U.S. economy back.
Getting corporations to invest in new businesses, plant and equipment, and new employees requires certainty. And this is the one thing that is lacking in so many important markets for the simple reason that there is too much debt.
There are actually a lot of fundamentals that are positive for corporations. Interest rates are very low, so borrowing costs have never been more favorable for big companies.
There is some price inflation in the economy, which translates to higher earnings, and because of the weakness in commodity prices, the cost of raw materials is going down.
But large corporations are not going to invest in major new operations in markets where there is the potential for massive instability—currency instability, for sure.
So the result is just the status quo for many corporations in terms of their business operations. This is why cash balances continue to build and share buybacks are so common.
I would say that given the earnings results so far, the stock market is not overvalued. If there isn’t any meaningful revenue growth … Read More
Earnings season is in full swing, and it’s looking like the retail/merchandising sectors are doing relatively well. The data support the case that consumers are spending again; whether this is sustainable or not is another matter, but for the first quarter, it looks like consumers have opened up their wallets.
One company that really surprised to the upside was Overstock.com, Inc. (NASDAQ/OSTK). On the stock market, the company’s been in the doldrums for years, but its current numbers certainly show renewed momentum in its operations.
According to the company, its 2013 first-quarter sales grew 19% to $312 million, direct revenues grew modestly to $41.9 million, and fulfillment partner revenues shot up to $270 million from $221 million in the comparable quarter last year.
Earnings grew significantly to $7.7 million, up from $2.7 million year-over-year. Diluted earnings per share were $0.32, compared to $0.12 in the first quarter of 2012.
eBay Inc. (NASDAQ/EBAY) slightly disappointed the marketplace by reporting revenues that came in just a hair below consensus. The company’s earnings were still very solid, but it reduced its earnings outlook range for the second quarter of 2013, causing investors to sell the stock.
Amazon.com, Inc. (NASDAQ/AMZN) is the big kahuna in the online retail space. The company reports its first-quarter earnings tomorrow; the Street expects adjusted earnings of approximately $0.09 per share, with average revenues of $16.18 billion.
On the stock market, Amazon has had a tremendous run since March 2009. The company’s share price is up fivefold on the stock market since then and is very much due for a break.
The one thing that Amazon keeps doing, despite … Read More
Corporations are reporting a mixed bag this earnings season. Some companies are outperforming, while others have come in just a little bit short with their numbers.
The one thing I would say, however, is that the balance sheets continue to be outstanding, especially in large-cap companies. This gives a lot of leeway for corporations to weather any economic storm down the road.
PepsiCo, Inc. (NYSE/PEP) reported wonderful earnings results in its first quarter. The stock popped four percent after reporting its earnings, with news and management affirming solid guidance for the rest of the year. This is one of many corporations that can do well on the stock market throughout the rest of this decade.
Some corporations reported basically zero growth, but that doesn’t mean that business conditions have gone bad. The fourth quarter of 2012 saw a gross domestic product (GDP) that was just terrible, and so it’s unreasonable to expect the first-quarter GDP of 2013 to be outstanding.
But what I am reading so far in many earnings reports is that corporations are expecting business conditions to get better, especially towards the end of the year.
Union Pacific Corporation (NYSE/UNP) is another benchmark stock that jumped four percent after reporting great earnings. Even if you don’t own this stock or wouldn’t consider it in your portfolio, it pays to read this company’s numbers, because it’s a great barometer on the U.S. economy. Railroad corporations are leading indicators and Union Pacific was able to grow its earnings by increasing prices—a very good development.
There are still all kinds of earnings reports to come in, and what this stock market … Read More
Any stock market portfolio that’s being used to save for retirement or otherwise, should have some exposure to the pharmaceutical industry.
But instead of pure play corporations like a discovery biotechnology firm, there are great businesses out there that offer a combination of pharmaceutical development and consumer products.
This extra diversification provides a lot of safety and a growth opportunity, as well.
On the stock market, one of a number of blue chip corporations that are great brands and offer this combination of pharmaceutical and consumer product exposure is Johnson & Johnson (NYSE/JNJ).
Johnson & Johnson is up 20% since the beginning of the year, which is pretty spectacular. Institutional investors are buying safety, and this is what Johnson & Johnson offers.
There are actually only a handful of corporations that are large-cap, blue-chip pharmaceutical and consumer products businesses.
Another of these corporations is Abbott Laboratories (NYSE/ABT). The company just beat the Street with its latest numbers.
On the stock market, Abbott Laboratories is trading at its record high and looks to be in a fairly solid uptrend. Of course, it’s very difficult to make a case for buying any stocks in this kind of market. The company’s stock chart is below:
Stock chart courtesy of www.StockCharts.com
Abbott Laboratories reported global sales of $5.4 billion, representing an increase of 3.5% on an operational basis. The company’s nutritional products division experienced a nine-percent gain in sales, while diagnostics grew 6.4%.
Earnings from continuing operations in the first quarter of 2013 were $544 million, or $0.34 per share, compared with earnings from continuing operations of $351 million, or $0.22 per share, in … Read More
The big drop in the value of many commodities is very good news for this stock market.
All of a sudden, raw materials are cheaper in price. This is going to translate right to the bottom line of many corporations.
And one of the best developments is the weaker price of oil. Big oil stocks have done consistently well in the stock market, but smaller corporations have struggled due to the fact that the spot price has not been able to move much past the $95.00-per-barrel level. Now that spot oil is below $90.00 a barrel, transportation stocks are really going to benefit.
Of course, it takes time for big oil corporations to reduce gasoline prices. It’s common knowledge that when the spot price of oil spikes, gasoline prices immediately go higher. But when oil drops, it always takes much longer for gasoline prices to reflect reality. This is the nature of big oil, and there’s nothing that can be done about that.
The stock market is currently digesting a slew of earnings from corporations, as well as economic news that continues to show economic struggle.
But with gold, silver, and oil all trending lower, this is an absolute gift to the majority of old economy corporations.
It never used to be this way until recently, but the U.S. stock market now trades off of China’s economic data. And while China is still growing significantly, it’s all about expectations for high growth, not the degree to which the economy may be contracting.
The plunging spot price of gold is partially a reflection of the sentiment that investors have regarding risk. … Read More
Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.
The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.
It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.
This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.
There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.
Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.
One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.
There may be some spectacular downside … Read More
Most components of the Dow Jones Industrial Average are doing well—some exceptionally well. Alcoa Inc. (NYSE/AA) is one of the laggards, and really, all the position has done on the stock market is return to its historical norm. The company reports in a couple of weeks, and it is currently richly valued on a price-to-earnings (P/E) ratio.
The opposite of Alcoa’s position is 3M Company (NYSE/MMM), which is trading at an all-time record high on the stock market and is not expensively priced. This Dow Jones component has basically been ticking higher since the beginning of 1962. It traded sideways between 2005 and 2012, but it’s a consistent winner for sure.
The Dow Jones Transportation Average and the Dow Jones Industrial Average have been leading the stock market in recent history. The strength in transportation stocks is highly significant in terms of a leading indicator for the rest of the stock market. And the strength in the Dow Jones Industrials isn’t as much an expansion of valuations for these specific old economy stocks; it’s because business conditions for these companies are pretty decent.
Institutional investors have been buying safer names, which is why Dow Jones component companies like The Procter & Gamble Company (NYSE/PG) and Johnson & Johnson (NYSE/JNJ) have traded up so strongly since the beginning of the year. These companies are appreciating like fast-growing technology stocks. It is a bull market signal.
We’re on the cusp of a new earnings season, and the numbers, so far, have been decent, peppered with a few disappointments. In order for the stock market to keep advancing, it needs greater leadership from … Read More
There is a resilience to this stock market, and regardless of the reason, it’s a play by institutional investors that first-quarter earnings season will be decent, as well as further earnings growth later this year.
While it’s tough to think about with the stock market at its highs, this market could go a lot higher yet, based on continuing stimulus from the Federal Reserve and a slight improvement in business conditions.
One of the best things available from the massive cash balances that large corporations have accumulated is increasing dividends. The stock market saw a lot of new dividend announcements last year, partially because of tax changes but also because companies can afford it.
This is a trend that is going to continue this year, and it’s good news for blue chip investors who are saving for retirement.
There are a lot of attractive blue chips that are growing their earnings and are not expensively priced in this stock market. Wal-Mart Stores, Inc. (NYSE/WMT) is five points below its recent high; it has a current dividend yield of 2.6% and a price-to-earnings (P/E) ratio of about 14.5. Wal-Mart’s longer-term stock chart is featured below:
Chart courtesy of www.StockCharts.com
Wal-Mart has been trading sideways for years, and its recent stock market breakout is meaningful. Again, Wal-Mart is not expensively priced, and Wall Street continues to nudge the company’s 2013 earnings estimates higher.
This upcoming earnings season is make or break for the stock market. Most corporations were coy with their forecasts last quarter, but they do this on purpose so as to show outperformance. But even with these conservative forecasts, most … Read More
When the stock market experiences its next major pullback, it should be an attractive entry point to consider select large-caps that pay dividends. On the cusp of another earnings season, most large U.S. corporations are in excellent financial health.
There are a number of investment themes playing out in the current business cycle. When gold prices were lofty, stocks like Caterpillar Inc. (NYSE/CAT) and Joy Global Inc. (NYSE/JOY) were really doing well.
Stock markets in China, the world’s second-largest economy, have been drifting for several years, but emerging markets, like the Philippines and Malaysia, are growing like mad. And Japan’s stock market recently turned significantly higher. Many Japanese companies are expecting strong revenue gains this year on the back of a weaker yen.
The ebb and flow of the global business cycle is always changing; and with inflation creeping into the U.S. economy, the next big play will be in real assets, as the commodity price cycle makes its final migration into the agriculture sector.
Deere & Company (NYSE/DE) has the biggest market share of any large equipment manufacturer related to agriculture in the U.S. Currently, the stock is not expensively priced, with a price-to-earnings (P/E) ratio around 11.5. Deere’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
On the stock market, Deere has proven to be cyclical and a very good long-term wealth creator for shareholders. Since 1963, the company has split its stock two-for-one on four occasions, the last one being in November 2007. Deere also split its stock three-for-one in November 2005, and the company has been increasing its annual dividends consistently for the last 10 … Read More
There’s no need to worry about the stock market’s gyrations after the Federal Reserve said it was time to start thinking about ending quantitative easing. No other Federal Reserve in history has been more willing to accommodate Wall Street, so help through monetary policy won’t be going away anytime soon.
The stock market is appropriately valued, given current earnings, and it’s bouncing around its five-year highs on low trading volume, due to the uncertainty of economic growth going forward. In my opinion, the key is to lend less weight to the overall stock market and more to what corporations are saying about their businesses. While there is quite a bit of disparity among corporations and industries, 2012 fourth-quarter earnings season was generally good.
A lot of large-cap, dividend paying corporations said that they expect high single-digit growth this year, which including dividends, should result in another solid, low double-digit rate of return for investors. Adding to the story is the fact that corporations are not expensively priced on the stock market. In fact, many are trading quite a bit below their historical valuations.
So, while investment risk is high and trading volume on the stock market is low, the outlook from corporations is pretty much the same.
Consider The Procter & Gamble Company (NYSE/PG), for example. Procter & Gamble is one of several blue chip corporations in the consumer products industry. In its latest quarter, ended December 31, 2012, the company increased its core earnings per share by 12% to $1.22. The company also raised its 2013 fiscal year earnings guidance and increased its share buyback program. The company’s stock … Read More