While examining views and portfolios of many large, buy-side institutions, I’ve been reading what could only be described as unscientific cautious optimism for the U.S. economy.
There is an expectation to further accumulate the equity market’s existing winners based on earnings growth and valuations. The buy-side is paid to play, but I read many views with these intentions.
This is including corporations like Wal-Mart Stores, Inc. (NYSE/WMT), Johnson & Johnson (NYSE/JNJ), PepsiCo, Inc. (NYSE/PEP), The Home Depot, Inc. (NYSE/HD), International Business Machines Corporation (NYSE/IBM), and even Berkshire Hathaway, Inc. (NYSE/BRK-A).
Sticking with the equity market’s existing winners does make sense for institutional buyers for a number of reasons: liquidity, earnings reliability, growing dividends, very strong balance sheets, and window dressing. Big investors don’t want to look like they’ve missed the equity market’s top stocks.
Everybody knows what can go wrong, but what’s most important for investors is how you structure your portfolio to deal with the investment risk.
Because of the equity market’s stunning performance since the beginning of the year, I view investment risk as being way up. I am very reticent about buying stocks right now.
But what is most important is what corporations are saying about their businesses and how the institutional mindset interprets it.
Last week, Costco Wholesale Corporation (NASDAQ/COST) reported another solid quarter of growth in sales and earnings. The company said its fiscal third quarter of 2013 (ended May 12, 2013) produced sales growth of eight percent, reaching $23.6 billion.
Comparable store sales (which black out gasoline and currency changes due to volatility) grew a solid seven percent. (See “Retail Stocks Find Big Success in the Great Outdoors.”)
Earnings rose 18% to $459 million, or $1.04 per diluted share. Membership fees (which are highly profitable) jumped to $531 million from $475 million comparatively.
All macroeconomic factors matter, but it’s still the value attributed to a corporation’s business conditions by institutions that drives equity market prices.
Costco’s earnings results were great. As a low-margin, mature corporation, membership fees are an important contributor to Costco’s earnings.
Like so many other corporations, the company’s cash and short-term investments grew nicely from $5.98 billion in the comparable quarter to $6.51 billion, making it likely that the corporation will offer up another dividend increase this year. April’s sales were up seven percent to $7.98 billion, compared to the same period last year.
This equity market will still reward the performance of growing corporations, and Costco’s latest numbers were certainly impressive.