Stocks have been choppy since the beginning of the year and geopolitical events are now the near-term catalyst.
It’s a good reminder that it’s worthwhile to review investment risk to equities and what you can tolerate in terms of potential downside with stocks.
As these pages are focused on the equity market, investment risk is always a priority. Portfolio risk can get lost in a bull market, but it’s still a huge part of the equation in terms of overall strategy.
There’s just so much beyond your control as an individual investor. At the end of the day, with stocks, it’s an investment in a business commensurate with a bet that its per-share worth (which is only definitive in the event of a buyout) will be recognized by a marketplace ruled by fear, greed, and emotions.
In late 1999, The Procter & Gamble Company (PG) had an earnings miss and the stock was basically cut in half, as the hype related to technology stocks was coming apart. It took five full years for Procter & Gamble’s share price to recuperate from the sell-off; and while the company was still paying its dividends, that’s a long time for any equity investor…. Read More
Last Thursday, the CEO of DIRECTV (NASDAQ/DTV) said “…we are pleased to announce a share repurchase program of $3.5 billion. This repurchase program reflects our strong balance sheet and confidence in continued strong DIRECTV revenue, earnings and free cash flow growth, as well as our belief that our stock is far below our intrinsic value.” (Source: “DIRECTV Announces Fourth Quarter and Full Year 2013 Results,” DIRECTV, February 20, 2014.)
DIRECTV is buying back its shares because it believes they are undervalued? Since when did CEOs of companies on key stock indices become stock pickers?
In 2013, DIRECTV’s total corporate earnings came in at $2.85 billion. That means the company is spending 122% of what it made in 2013 to buy back its stock. Talk about pumping up per-share earnings!
Cisco Systems, Inc. (NASDAQ/CSCO), another major component of key stock indices, reports it is “raising” $8.0 billion to repay some of its debt. It will use the remainder of the money to buy back its shares and pay dividends. (Source: Cisco Systems, Inc., February 24, 2014.) Yes, instead of raising money to invest in equipment, technology, or research and development (R&D), the new fad is for companies to raise money to … Read More
Among blue chips, 3M Company (MMM) is getting a lot of increased earnings estimates from analysts. For such a mature company, 3M’s been doing very well on the stock market, and it looks to be well-positioned for more capital gains.
At the end of 2013, 3M had approximately 89,000 employees (full-time equivalent), of which 60% were based abroad. The company spends a lot on new research and development, and while many blue chips have been doing everything they can to squeeze costs, 3M keeps spending on new scientific and technology development ($1.57 billion in 2011, $1.63 billion in 2012, and $1.72 billion in 2013).
The largest component of the company’s sales is its industrial business, which makes a lot of product for automotive original equipment manufacturers (OEMs) and the automotive aftermarket. Products like tapes, sealants, ceramics, vinyl, polyester, and adhesives are sold to this market, but they’re also sold to electronics, appliance, food and beverage, construction, and paper and printing customers.
Thanks to the acquisition of Ceradyne Inc. in the fourth quarter of 2012, 3M is now one of the top manufacturers of advanced ceramics used for solar, electronics, and defense applications.
The company’s industrial business was 34% of … Read More
The NASDAQ Composite index sold off significantly in January to around 4,000. Then it recovered to its current level at 4,300, which is a pretty substantial move.
For a number of months now, the NASDAQ has been outperforming both the S&P 500 and Dow Jones Industrial Average. This relative outperformance continues to be a positive overall sign regarding sentiment.
I don’t really expect much from stocks this year, although the prospect of rising dividends still remains very good in the bottom half. 2013’s stock market performance was so exceptional and so substantial, especially among blue chips, that it’s time for earnings to catch up with share prices.
Not to be excluded, the performance of the Russell 2000 index has also been relatively strong compared to larger-caps. But this index still can’t quite keep up to the outperformance of the NASDAQ.
Stock market leadership from large-cap technology stocks is always a good thing. And a lot of it has been from older brand-name companies, the kind of former fast-growing stocks that are now almost income plays.
Oracle Corporation (ORCL) has been on the comeback trail after several quarters of disappointing results. This position has been treading water since the beginning of … Read More
Many smaller companies are now reporting their financial results, and very soon, it will be the lull between earnings seasons, when the only fuel the marketplace has to go on is monetary policy and economic news.
It wouldn’t surprise me at all if stocks took a break for the entire second quarter. Fourth-quarter financial results were decent, but they weren’t the kind of numbers that justify loading up on positions. Stocks seem to be about fully priced and there’s no real reason why they should go up near-term, especially considering last year’s performance.
The market had a tough time at the very beginning of the year but recovered strongly after the Federal Reserve provided certainty on monetary policy and the outlook for quantitative easing. There were some material corporate events in terms of new share buyback programs and select dividend increases, but most companies announce dividend news in the bottom half of the year; this is when we might see stocks generate further capital gains, if any.
Last year’s performance on the stock market was just so exceptional that stocks will be doing well if they close flat for this year.
Turning to blue chips for their corporate outlooks always … Read More
The single greatest certainty capital markets are looking for is policy stability from the Federal Reserve, and Janet Yellen, the new Chair of the Federal Reserve, delivered the goods for Wall Street.
With certainty in regards to short-term interest rates and the expectation that quantitative easing will continue to be reduced over the coming quarters, the fundamental backdrop for the stock market remains positive.
Many companies sold off after reporting earnings results that basically met consensus. This was well-deserved, especially in a market that has not experienced a meaningful correction for a number of quarters.
Particularly for large-caps, corporate earnings results in the last quarter of 2013 were decent and corporate outlooks for 2014 were also relatively positive, considering the current state of things.
Add in the high likelihood of rising dividends from blue chips in the bottom half of the year, and you have the makings of another decent year for stocks.
Corporate balance sheets are in top-notch condition, and the cost of capital is cheap. From the corporate perspective, this is the perfect backdrop for greater growth, and sales growth translates to the bottom line.
For the last couple of quarters, I’ve been reticent about investors buying this … Read More
The Walt Disney Company (DIS) powered ahead after announcing earnings results that handily beat Wall Street consensus.
The company’s diluted earnings per share increased a substantial 34% from $0.77 to $1.03. Sales for the quarter ended December 28, 2013 grew nine percent to $12.3 billion on a strong performance from studio entertainment and the commercial success of Frozen and Thor: The Dark World.
Once again, the company’s cash position improved materially. Several firms boosted their price targets on the stock and earnings estimates for future periods.
Disney has an uncanny ability to generate growth in an otherwise lackluster environment, illustrating the relative outperformance of media networks, movies, and related consumer products.
The company experienced double-digit comparable growth in studio entertainment, consumer products, and its interactive businesses. This past December, Disney boosted its annual cash dividend by 15% to $0.86 per share. (See “Large-Cap Stocks the Place to Be in 2014?”)
Disney seems to have continued operating momentum on its side, as its theme park business is growing. This division is the second-largest in terms of revenue contribution after media networks.
In terms of blue chips, Disney is not the stock with the highest yield in the … Read More
Top 5 Best Reasons to Invest in Gold
Profit Confidential has been bullish on gold shares for a decade now. And our love for gold bullion has not lost its shine. Back in 2002, when the price of gold bullion was trading under $300.00 an ounce, we first started recommending gold-related investments.
There continues to be a lot of value in the stock market today, and it’s commodity-related. But with expectations for declining economic growth in the world’s major economies, it’s easy to see why oil prices are around $96.00 a barrel, not $125.00.
Like the broader stock market, the price of gold bullion is holding up extremely well, and a big reason for this is the sovereign debt crisis in the eurozone. The price of gold bullion should be trending a little lower than it is, but even if emerging economies continue to slow, we don’t expect to see the price of gold bullion dip much below $1,400 or $1,300 an ounce in the next recession.
The risks in the global economy certainly outweigh the current economic fundamentals. When the price of gold bullion was roaring higher, gold stocks were keeping pace. Gold mining companies were able to raise … Read More
As evidence of the fervor that corporations have to try to keep shareholders happy, 3M Company (MMM) just announced that its board of directors authorized another major share repurchase program.
The company bought back $5.2 billion worth of its own shares in 2013 and can now repurchase up to $12.0 billion.
Stock buybacks are an old-school business strategy. Excess cash that management feels isn’t worth investing in new businesses, plant, equipment, and employees is simply allocated back to shareholders.
And whatever the endgame is for company management—to boost a falling share price, pay for dividends, meet earnings guidance or simply because it’s the easiest thing to do—share repurchases work for investors.
The stock market is a secondary market where share prices reflect relative values until a company becomes non-public (i.e. is taken private).
Some view share buyback programs as a tool a public company can use to prop up its earnings results, but in the large-cap space, this isn’t the case. The fact of the matter is that big business generates a lot of cash and cash management has been and will continue to be one of the main operations (usually part of the executive branch) of a company.
Earnings … Read More
This choppy trading action in stocks is here to stay for a while, and it could even be more pronounced once fourth-quarter earnings season ends.
The numbers continue to pour in, but the unease in investor sentiment is obvious, and it’s partially due to the fact that stocks didn’t experience a meaningful correction last year. Whatever the reason or catalyst, further retrenchment in share prices is an eventuality that’s easily in the cards this year.
While companies, especially large-cap corporations, are able to manipulate adjusted earnings and fully diluted earnings per share, the numbers are still only mediocre at best. And share prices came up so tremendously in the Fed-induced reflation that today’s earnings results aren’t making the case for buyers.
In the large-cap space, The Clorox Company (CLX) perfectly illustrates the numbers being presented by countless blue chips.
The company beat on revenues but missed on earnings. Fiscal second-quarter sales were flat at $1.33 billion. Net earnings were down to $115 million, or $0.87 per diluted share, as compared to earnings of $123 million, or $0.93 per diluted share last year. Currency translation had a material effect on U.S. dollar sales.
The company delivered one percent in total volume … Read More
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