When you hear business news, benchmark indices like the Dow Jones Industrial Average and S&P 500 are usually mentioned as economic indicators for what happened on the stock market.
For example, the Dow Jones Industrial Average comprises 30 different companies that trade on the New York Stock Exchange (NYSE) or the NASDAQ. When investors hear “Dow Jones edges higher today,” it simply means that, on average, the companies which constitute the index showed a price increase.
Benchmark indices contain stocks from different industries and provide a gauge of the overall market sentiment.
That said, the Dow Jones Industrial Average and the S&P 500 are not the only benchmark indices—there are many more, including the NASDAQ Composite Index, Russell 2000, S&P Midcap Index, and the NYSE Composite Index.
No matter which stock market index an investor looks at, it is bound to contain stocks from different industries. Within each index are benchmark stocks—companies that are leading indicators for both their respective industries and the economy in general.
How is it possible that one benchmark stock can gauge the national and global economy? Some of the benchmark stocks sell a great amount of products or services to consumers and businesses, and based on the earnings growth or contractions of these companies, analysts often get an idea about the health of the economy.
For example, Wal-Mart Stores, Inc. (NYSE/WMT), the world’s biggest retailer, is often referred to as a benchmark stock for retail sales. If profits and revenue at Wal-Mart are strong, consumer retail sales can be construed as healthy. At the same time, weak or strong Wal-Mart revenues point to how much discretionary income the average American has and their spending patterns. When consumers are buying goods from cheaper retailers, diverting sales from more expensive retailers, it means that they are hoping to save money.
Similarly, General Electric Company (NYSE/GE), which is really a portfolio of large diversified corporations, is also a benchmark stock and reflects general business sentiment. If General Electric (GE) is reporting strong earnings and sales, it means business activity is strong. In addition, it also suggests that customers aren’t as price-sensitive, and are more willing to spend money.
Another benchmark stock is Nucor Corporation (NYSE/NUE). The company manufactures and sells steel products around the world. If the company reports higher revenue growth and increasing profits, it means manufacturing and construction is picking up.
Another one of the benchmark stocks that Profit Confidential follows is Union Pacific Corporation (NYSE/UNP). Following this company is a great way to get a feel for the industrial economy. Union Pacific is the market leader among the railroads, which are also a key indicator for the stock market.
Following benchmark stocks is a great way to focus your stock market view. With benchmark stocks, you can look beyond the headlines and get a solid feel for how a business and industry is doing. Following benchmark stocks helps provide clarity through all the noise.
As the editors at Profit Confidential, we spend a significant amount of time researching benchmark stocks, and how they reflect both domestic and global economic sentiment. We regularly guide our readers and provide regular commentary on these benchmark stocks.
Railroad stocks as a group have returned to their 52-week highs. I like Union Pacific Corporation (NYSE/UNP) and Canadian National Railway Company (NYSE/CNI). They are the strongest of the group and are trading right at their all-time record highs.
These two companies are worth accumulating when they’re down. According to history, they are typically not down for long. Wall Street keeps edging their earnings estimates higher for 2013 and 2014. Railroad stocks are pretty good with their guidance.
Bakken oil (and natural gas) is a huge opportunity for the U.S. economy. The production boom is happening now, with all its benefits, disadvantages, and costs. But a lot of junior oil stocks playing this patch aren’t moving upward in the stock market in the face of weak oil prices. The Bakken oil boom itself is a counter play on rising prices.
Phillips 66 (NYSE/PSX), a real winner since being spun off from ConocoPhillips (NYSE/COP), recently announced it will ship Bakken oil from North Dakota to New Jersey by rail. According to the Association of American Railroads, in 2008, U.S. Class I railroads originated 9,500 carloads of crude oil. In 2011, the number was 66,000 carloads. The final number for 2012 is expected to exceed 200,000 carloads, and railroads are also expected to deliver large amounts of frac sand to drill sites. This is a seriously good trend for railroad stocks. The stock chart for Phillips 66 is featured below:
Chart courtesy of www.StockCharts.com
Of course, the Bakken oil boom has its consequences, and we’re not even talking environmentally. Make no mistake: big oil is not interested in U.S. energy independence. Its … Read More
The first thing that consumers do when a recession or financial crisis hits is cut discretionary spending. That’s why a benchmark stock like Harley-Davidson, Inc. (NYSE/HOG) feels the pain immediately. HOG’s stock market value plunged in the last half of 2008, as the recession took hold. Then the financial crisis hit and it took three years for the shares to recover. HOG used to be a stock market darling.
As a kind of benchmark stock for discretionary (luxury) spending, the company’s first-quarter earnings report was excellent. It reported a 20% increase in total retail sales of new Harley-Davidson motorcycles worldwide. In the U.S. market, retail sales grew an impressive 25.5% and more than a third of motorcycle sales were to riders who were new to the brand. First-quarter revenues grew 20% to $1.27 billion and net income grew 45% to $172 million.
On the stock market, HOG is trading at a new 52-week high, but is only now back to the price it was trading at in August 2000—that’s almost 12 years ago! As a benchmark stock in the consumer goods sector, the company’s earnings and visibility are positive indicators. International sales are a growing portion of revenues, but that’s the case with most large-cap companies nowadays.
Another benchmark stock that is worth following is Caterpillar Inc. (NYSE/CAT), which reported another record quarter for earnings and raised its guidance for the rest of this year. The company’s total revenues grew 23% in the first quarter to $15.98 billion and earnings grew 29% to $1.59 billion.
The U.S. economy is generating economic growth, but not consistently and not all sectors are experiencing the same level of business activity. Parts of the industrial economy are holding up well, the financials are improving, and the technology sector has led the stock market. But what you might not know or have heard about is that Wall Street analysts are lowering their earnings outlooks. The trend took hold in the fourth quarter last year and it’s still happening. The continued reduction in earnings expectations reflects the current economic reality and it’s a key indicator to me that the stock market will have a difficult time accelerating higher from its current level.
This is why I continue to harp on the dividends investment theme for most stock market investors. Dividends are critical in a slow growth environment and in the age of austerity. As consumers, we all know that the price inflation we experience is higher than the government reports. You might not have to spend more to buy a t-shirt, but you sure do for a good loaf of bread and a tank of gasoline. With declining expectations all around the world for economic and corporate earnings growth, dividends are one of the very few options available to investors, just to beat the prevailing inflation rate. And what you want to own are companies that not only pay a good amount of dividends to begin with, but also are increasing their dividends per share on an annual basis.
To me, a high-flying stock with upward price momentum is as attractive as a big, well-established company that has a track … Read More
I’d like to report on a benchmark stock that I consider an important market indicator for the U.S. economy. I’ve written about Union Pacific Corporation (NYSE/UNP) many times as a company to follow and its first-quarter numbers were just plain excellent. This company has been a real leader on the stock market and the stock still isn’t expensively priced. In my view, the continued strength in the railroad industry is a positive indicator regarding the health of the industrial U.S. economy.
The company’s 2012 first-quarter revenues grew 14% to $5.11 billion, up solidly over the first quarter of 2011. Earnings, however, improved a healthy 39% on a per share basis to $863 million, or $1.79. This earnings growth is particularly impressive considering the company’s average cost for diesel fuel grew 12% to $3.23 a gallon during the quarter.
Union Pacific reported that four out of its six business groups generated solid volume growth during the quarter. The company’s automotive freight revenues did the best growing 26%. Industrial products were up 25%, while chemicals grew 16% and intermodal grew 15%. Slower freight revenue growth occurred in agriculture shipments and energy products, at six percent and five percent, respectively.
As I expected, the company’s coal shipments were a bit soft. (See My Favorite Benchmark Stocks That Lead the Stock Market.) With natural gas prices extremely low, power plants don’t need to burn as much coal to generate electricity. This past winter was also unusually warm. During the first quarter, Union Pacific bought back 3.9 million of its own common shares at an average price of $110.64 per share, spending a … Read More
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