Lots of Companies Doing Well, But
the Marketplace Isn’t Listening

You might not know it, but there is real strength in this market from a number of well-managed, dividend-paying stocks. But the marketplace isn't listening.You might not know it, but there is real strength in this market from a number of well-managed, dividend-paying stocks. When the broader market is gyrating and investor sentiment is weak, outperformance comes in the form of stability. Plenty of stocks in this market are outperforming the broader stock market and, in spite of all the worries about the sovereign debt crisis and the outlook for economic growth, the earnings picture continues to look good.

I find a number of companies at this time that are generating good operating results and are outperforming on the stock market. Take Kraft Foods Inc. (NYSE/KFT), for example. The world’s second largest food company with annual revenues over $48.0 billion is holding up very well in this market. After hitting a new 52-week high of $36.02 per share in July, the stock is currently trading around the $34.00-per-share level. That’s impressive from my perspective, if you compare this to the action in the rest of the stock market.

Kraft Foods reported second-quarter revenues of $13.9 billion for a gain of 13.3%, including a 2.1% benefit from accounting calendar changes. Organic revenue growth was 7.1% during the quarter, driven by solid demand and higher pricing in all geographic markets. Operating income grew 6.2% and the company increased its outlook for 2011 organic net revenue growth to at least five percent. The stock’s current dividend yield is about 3.4% and so the expectation as a shareholder in a mature company like this would be for a rate of return of around 10%. The median Wall Street one-year price target on Kraft Foods is $40.00 per share.

Then there’s a company like Intel Corporation (NASDAQ/INTC), which is the world’s largest manufacturer of semiconductors, otherwise known as computer chips. Right now, the stock is only a few points below its 52-week high and seems very well valued with a price-to-earnings ratio of under 10.

In its latest quarter, the company’s second-quarter revenues grew 21% to a record $13.0 billion. Net income grew two percent to $3.0 billion, while earnings per share grew six percent to $0.54 during the quarter. The company generated approximately $4.0 billion in cash from operations, paid cash dividends of $961 million, and used $2.0 billion to repurchase 93 million shares of common stock. The stock’s current dividend yield is 4.3% and 2011 full-year earnings are expected to grow about 15%.

The broader market is suffering from a crisis of confidence, while many businesses in the marketplace keep humming along. The third quarter is almost at an end and, so far, we haven’t had virtually any earnings warnings from corporations. What this means to me is that stocks are cheap considering the earnings picture and that we’re due for a rally. The question is: when will the rally happen? With investor sentiment so fragile, it could be later this year or later in 2012. There is a lot of noise in financial markets right now and the risks are valid. However, this is a marketplace that isn’t listening to what corporations are saying…and valuations are becoming that much more attractive.