Established in 1957, the S&P 500, also known as the Standard and Poor’s 500 Index, is a capitalization-weighted index of 500 large-cap common stocks. Capitalization-weighted means that the companies with largest stock market capitalization have the greatest impact on the value of the index. The S&P 500 is the second most widely followed stock market index in America after the Dow Jones Industrial Average.
The financial media and analysts are talking endlessly about the state and fragility of the stock market and whether a bottom may be near. I discussed the vulnerability to the downside in my last article. If you missed it, you may want to go back and read what I said. (See “Strategies to Protect Your Capital While Investing in This Market.”)
While stocks appear to be heading to negative ground in 2014, I view continued weakness as a buying opportunity to accumulate some stocks at a discount.
For the majority of you, I would advise staying away from the higher-beta small-cap and momentum stocks at this time and wait for things to settle down. In other words, I want to see some sustained buying support emerge to show some evidence the downside selling is coming to an end.
In the meantime, take a look at some of the bigger S&P 500 and DOW stocks that have moved lower to much more attractive entry points.
In the technology area, I like what’s happening at former Wall Street darling Microsoft Corporation (NASDAQ/MSFT) under the stewardship of CEO Satya Nadella.
While Nadella recently said some disparaging remarks on females in the workforce, what he has done at Microsoft since taking over from former CEO Steve Ballmer has been encouraging.
The rise in the stock price in Microsoft has even allowed Ballmer to pay an obscene $2.0-billon-plus for the LA Clippers. Ballmer’s failure to recognize and fully understand the big impact the mobile sector has on the technology space helped to make Microsoft insignificant for years.
Chart courtesy of www.StockCharts.com
Nadella has shifted his … Read More
On the day that the DOW, S&P 500, and NASDAQ Composite dropped two percent on global growth worries, once again, several companies reported very good numbers.
But investors are paying less attention to corporate results and more attention to economic news from around the world that suggests that the only mature economic engine running at any positive speed currently is the U.S. economy.
PepsiCo, Inc. (PEP) had another good quarter. The company’s two businesses, food/snacks and beverages, produced modest single-digit growth in consolidated sales.
Net earnings grew five percent, while earnings per share grew seven percent over the third quarter last year. Management also increased its expected constant currency earnings-per-share growth for this year from eight to nine percent.
The company expects to return a total of some $8.7 billion to shareholders this year, comprising approximately $3.7 billion in dividends and $5.0 billion in share buybacks.
PepsiCo is on track to deliver what investors expect. The stock just hit a new all-time record-high still with a 2.8% dividend yield.
Getting into third-quarter earnings season a little further should help focus the stock market’s attention but clearly, sentiment has really turned.
If the trading action continues to wane, good businesses are going to become more attractively priced and equity investors looking for new positions will have better choices.
I do believe that for the investment risk, sticking with existing winners is a good strategy regarding large-cap, dividend-paying blue chips.
Dividend income really matters in a slow-growth environment, and corporations would still rather return cash than take on major new ventures.
Previously in these pages, I’ve written that for long-term investors, I … Read More
In these pages, I have been very critical about stock buybacks by companies on the key stock indices. I see them as nothing more than a form of financial engineering used to manipulate per-share corporate earnings…and a bad investment for the companies buying their stocks back.
According to data compiled by Bloomberg and the S&P Dow Jones Indices, companies on the key stock indices are expected to spend $914 billion on share buybacks and dividends this year. Looking at it from their corporate earnings perspective, public companies will be paying out 95% of what they earn. (Source: Bloomberg, October 6, 2014.) Look at it this way: for every $100.00 of corporate earnings, they are paying out $95.00.
Almost $2.0 trillion has been spent by public companies on stock buybacks since 2009.
When companies increase buybacks, all else unchanged, they show an increase in their per-share corporate earnings. Some of the biggest names in key stock indices are doing this. FedEx Corporation (NYSE/FDX) was able to increase its per-share corporate earnings by seven percent, almost all directly related to its stock buyback program (reducing the amount of shares it has outstanding).
Why do I think stock buybacks are bad?
Over the past few years, companies on the key stock indices, by buying their own shares back and removing them from the market, have created a mirage that business is good because their stock prices are rising.
But business isn’t better. If the S&P 500 companies are spending 95% of their corporate earnings on share buybacks and dividends, it means they are spending very few dollars on growing their business.
According to … Read More
There are no secrets to dealing with the current stock market malaise. The key is to simply understand, manage, and deal with the inherent risk. I’m not talking just about the domestic risk, but also the economic risk from Europe and China, along with the geopolitical risk in Syria and Ukraine.
As you probably all know, the stock market hates uncertainty and there’s plenty of it. Until the uncertainties dissipate, the stock market will be vulnerable to a correction.
This is not difficult to understand as the stock market, with the exception of the small-cap segment, has not recorded a correction of six percent or more for quite some time. The reality is that the key stock market indices are only down less than three percent from their highs, so we could see additional selling.
Given that the technical picture is bearish, with the key stock market indices trading below their respective 50-day moving averages (MAs), we could be in for more downside moves.
In fact, failure to attract support at the 200-day MA would be negative, based on my technical analysis.
The S&P 500 could trade down to below 1,900 should the stock market correction hold in place. At that point, I would be looking to add to positions if support surfaces.
The fact is that I want to see some chaos develop in the stock market as situations like this usually provide an excellent buying opportunity. Simply put, panic means opportunities.
While the near-term trend is down and the intermediate trend is fragile, as long as the long-term trends remain in place, I would be looking to buy … Read More
The stock market is clearly struggling to stay afloat at this juncture, balancing the domestic economic renewal with the global risk coming from ISIS, Russia, the eurozone, and economic stalling in China.
A major catalyst or a reason to buy is what investors are searching for. The focus later next week will shift to the third-quarter earnings season, which is carefully monitored by investors.
The start of the third-quarter earnings season will officially begin with Alcoa Inc. (NYSE/AA) reporting next Wednesday. Alcoa is a decent barometer of the global economy. The company reported an excellent second-quarter earnings season, albeit the quarter was relatively average.
All eyes will focus not only on the ability of CEOs to control the expense side to drive revenues, but also on the actual revenue growth. The strong second-quarter gross domestic product (GDP) growth will help.
For the third-quarter earnings season, the earnings growth is estimated at 4.7%, well down from a much higher 8.9% as of June 30, according to a report from FactSet. (Source: “Earnings Insight: S&P 500,” FactSet web site, September 26, 2014.)
Worse yet, the report suggests that nine of the 10 sectors have reduced their earnings season expectations. This is not supportive of the recent record moves by the DOW and S&P 500.
Only the healthcare sector appears to have increased its expected earnings growth, bumping it up to 10.6% for the third-quarter earnings season, up from 9.4% as of June 30. Investors could consider buying an exchange-traded fund (ETF) to benefit, such as the SPDR S&P Health Care Equipment ETF (NYSEArca/XHE). On the small-cap stocks side, a healthcare ETF to … Read More
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