The technical rebound from the stock market was overdue, but it may not last because of the prevailing investment risk related to the sovereign debt. The interest rate cycle may still favor equities over any other asset class, but that doesn’t mean that the headwinds in the marketplace are any less prevalent. This stock market is going to have a difficult time advancing without meaningful revenue and earnings growth.
With this in mind, I still feel that the stock market is trading at the level that it should be, given current earnings. There is even decent value in this market among a number of blue chips, and while the Street isn’t expecting robust earnings growth going into 2013, earnings outlooks for a number of brand-name companies are pretty decent.
Consider, for example, The Procter & Gamble Company (NYSE/PG). This year, both revenues and earnings are expected to be about the same as they were in 2011. So, as an investor, you might only expect to earn an annual rate of return similar to the company’s dividend payments, approximately 3.5% to four percent. For 2013, Street analysts expect Procter & Gamble’s earnings to grow approximately 8.5%, which, when combined with the company’s dividend, should produce a low double-digit return on investment (ROI). This isn’t bad considering we’re in a no-growth environment. Procter & Gamble’s stock chart is below:
Chart courtesy of www.StockCharts.com
Then there’s Automatic Data Processing, Inc. (NASDAQ/ADP), which is a payroll processing company that’s a good benchmark on employment. Wall Street keeps increasing the company’s earnings estimates for its next fiscal year. The average estimate calls for approximately 10.0% in adjusted earnings-per-share growth, on the back of a 7.5% gain in total revenues. Automatic Data Processing’s current dividend yield is approximately 3.2%. This company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
So it’s not all bad news on the corporate front, and extremely healthy corporate balance sheets are very evident in a lot of the numbers. (See “Blue Chips: How They’re Looking in This Market.”) But this still doesn’t make it easy to be a buyer in a stock market so fraught with investment risk. For companies like Procter &Gamble and Automatic Data Processing, corporate investment risk is actually lower than stock market investment risk. And it’s a similar story for a lot of blue chips.
In this kind of market, equity investors don’t need to rush into any positions. There is no wind at your back from the broader stock market, so individual stock selection is key. For a new investor looking at this market, I’d wait for more downside in share prices before considering new positions. Stocks are fairly valued at this time, but the stock market itself is fraught with risk.
The Great Companies Weathering the Storm was last modified: November 21st, 2012 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)