Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘blue chips’

The Big News on 2Q14 Earnings Season So Far

By for Profit Confidential

My Two New Favorite Stocks This Earnings SeasonThe numbers are in from Johnson & Johnson (JNJ) and they’re good. The position sold off on the news, which is no big surprise considering how well it’s done since the beginning of the year.

Johnson & Johnson is still mostly a pharmaceutical play, but it won’t likely be able to produce the same growth results it experienced from its hepatitis C drug in its most recent quarter.

The company adjusted its earnings-per-share guidance slightly higher and lowered its full-year sales guidance also just slightly.

The second quarter saw the company produce sales growth of nine percent to approximately $19.5 billion and adjusted earnings growth (excluding one-time items) of about 12% to $1.66 a share, which handily beat Wall Street consensus. (See “Why This Institutional Favorite Tops My List of Stocks.”)

While I do think that second-quarter earnings from blue chips will be pretty decent, it’s not unreasonable at all for these positions to sell off on the news. Stocks have come a long way, even just since the beginning of this year.

The stock market needs a break, or at the very least, another material price consolidation. It would be a healthy development for the long-run trend.

Another company that just reported a decent second quarter was CSX Corporation (CSX), which is the biggest railroad in the eastern U.S. market.

Management cited broad-based economic momentum in its rail freight business. The company’s numbers basically met consensus with second-quarter sales growth of 6.5% to $3.24 billion and earnings of $529 million, or $0.53 per share, up a penny from consensus.

The company plans to increase its capital spending … Read More

The Stocks That Will Be the Highlight of 2Q14

By for Profit Confidential

Which Companies to Look to This Earnings SeasonEarnings season is always a great time of year to get up to speed on what corporations are saying about business conditions. The numbers are also useful in the sense that you can garner a lot of market intelligence regarding specific industries. And even if you aren’t interested in a specific company, brand-name earnings (or at least a summary of the numbers) can help hone your market view.

But it’s not just about how capital markets interpret corporate results. While earnings are managed, investors need to know if there is genuine sales growth taking place and in which market.

One trend that’s been evident for a number of quarters now is that many companies have been able to modestly increase their prices without materially affecting demand.

During the first-quarter earnings season, many corporations said that their operations in Europe were experiencing renewed vigor. It will be interesting to see if this trend continues this earnings season. Many times, quarterly results reflect one-time events or short spurts in either industrial or consumer demand that aren’t indicative of a new trend you can bet on.

Earnings reports are simply press releases in which companies put their best spin on what’s transpired during the quarter. The real news is the numbers themselves, and a company’s income statement and balance sheets are where I begin to look.

Also invaluable are U.S. Securities and Exchange Commission (SEC) filings, especially the Form 10-Q, which is a much more informative document. The numbers can still be unaudited in the quarterly filings, but not the Form 10-K, which is a detailed annual report that requires fully audited numbers…. Read More

Simple Wealth-Creating Strategy for Long-Term Investors

By for Profit Confidential

Compounding Strategy Every Investor Should ConsiderAs a strong believer in the wealth-creating effects of large-cap, dividend paying stocks, I’m also an advocate of dividend reinvestment, which is the purchasing of a company’s shares using the cash dividends paid.

This can be done commission-free from your broker and/or through the company itself if it offers such a program.

Dividend reinvestment is a powerful wealth creator if you do not require the income paid out by a corporation. It is a great way to invest and to grow your money over the long-term.

As the timespan increases, the percentage return produced by the S&P 500 becomes weighted to dividends. It’s kind of old school, but the numbers add up. Even over a few short years of good broader market performance, total investment returns can increase substantially over simple capital gains.

For example, if you bought shares in Intel Corporation (INTC) at the beginning of 2010, that stock would have produced a capital gain to date of approximately 50%.

But if you reinvested the dividends paid by Intel into new shares each quarter, your total investment return, including dividends and new shares, jumps to approximately 75%, which is a very big difference!

In the utility sector, Duke Energy Corporation (DUK) increased on the stock market about 30% over the last three years. But by reinvesting the company’s dividends into new shares during that same time period, your total return could have climbed to around 49%. Again, this is a material improvement.

Of course, dividend reinvestment excludes the potential returns to be had with the income being applied to other potential assets.

But the process is so easy, and … Read More

Why This Institutional Favorite Tops My List of Stocks

By for Profit Confidential

Why This Company Is One Great Long-Term PlayOne of my favorite companies for long-term, income-seeking investors is Johnson & Johnson (JNJ).

While pharmaceuticals are the company’s anchor, its other business lines help with cash flow and dividend increases.

Investors have bid Johnson & Johnson shares tremendously in recent years, and it’s difficult to consider buying the company now, as the position is up another 10 points since March.

But Johnson & Johnson is the kind of stock income-seeking investors should keep an eye on for more attractive entry points, even though they may not come around all that often. The most recent possible entry points were in late September of last year and late January of this year.

My expectations for a mature company like this is for total annual sales to grow by the mid-single digits, with earnings growth and dividends producing an approximate 10% total annual return.

With a 10% annual return on investment, your money doubles every seven years.

Johnson & Johnson is typically priced at a slight premium to the S&P 500, but the company has earned its higher valuation by providing relatively consistent growth, reliable corporate outlooks, and a strong track record of dividend increases.

The company’s stock chart is featured below:

Johnson & Johnson Chart

Chart courtesy of www.StockCharts.com

Johnson & Johnson has typically been a good performer over the long term, but just like any large-cap, it can sit and produce no capital gains for long periods of time.

The position broke out at the beginning of 2013 after a number of years of modest capital gains. Institutional investors, wanting the earnings safety and solid dividends that the company provided, bid the stock … Read More

Your Top Priority When Investing in a Record-High Market

By for Profit Confidential

What to Prioritize with Stocks at an All-time HighStocks are going to gyrate around second-quarter earnings, but that’s exactly what this market needs—the corporate bottom line and expectations for the rest of the year.

With so many stocks trading at their all-time record-highs, I view investment risk in equities as being high at this time.

This is actually a tough environment in which to be an investor looking for new positions. There’s not a lot of value around and good businesses have already been bid.

It’s been years now since the stock market was first in need of a material price correction, and the next one will probably come out of nowhere.

It could be a shock from the Federal Reserve, but the central bank has been extremely delicate in how it effects and communicates monetary policy. More likely, stocks will be vulnerable to an unforeseen shock like a geopolitical event or a big derivative trade gone bad.

The risks are out there and stocks are long overdue for a reckoning.

With this in mind, I’m still a fan of the market’s existing winners, especially dividend-paying blue chips. In the absence of a shock, I think they’ll just keep pushing new highs going right into 2015.

3M Company (MMM) is an enterprise worth following and owning as a long-term, income-seeking investor.

The company’s earnings are material and offer good market intelligence, even if you aren’t interested in owning the stock.

The position has tripled in value on the stock market since the beginning of 2009, while also paying some great dividends.

The stock is still strong in the current environment, and the company represents exactly the kind of … Read More

What Investors Need to Know About the Current Market Cycle

By for Profit Confidential

What These Large-Caps Are Revealing About the Current Stock Market CycleIf there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.

This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.

And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)

The stock actually offers a pretty decent dividend. It’s currently around 2.6%.

While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.

The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.

Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.

Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.

Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More

These Safest Names Still Offer the Best Returns

By for Profit Confidential

Same Old Trend to Continue Despite Improved Earnings NumbersThe earnings are beginning to flow and it’s a total mixed bag out there again.

Carnival Corporation (CCL) beat the Street with its second-quarter numbers, with cruise line sales growing four percent over the second quarter of 2013.

Guidance, however, was mediocre and the position sold off on its earnings results.

Walgreen Co. (WAG) has been very strong on the stock market over the last 12 months. The drugstore chain produced a six-percent gain in sales to $19.4 billion, and a 16% gain in earnings to $722 million.

But the company is getting squeezed both by health insurers and pharmaceutical manufacturers, so its business model is getting pressured.

Walgreen is considering reincorporating overseas to reduce its tax burden, but it won’t have details on any potential plan until later in the summer. The stock went up on the news.

Second-quarter earnings results were actually a bit better than expected and once we get into blue chip numbers, I think the market will be a bit more appeased.

It is important to remember where stocks are coming from. It’s been an exceptionally good last few years for equities; 2013 was outstanding.

The first quarter was a tough one, both due to the weather and general business cycle conditions. The market isn’t expecting second-quarter numbers to be strong, and that goes for both gross domestic product (GDP) and corporate earnings.

All that corporations have to do is meet or beat on one financial metric and either affirm or improve existing full-year guidance. With this backdrop, institutional investors will keep buying.

Monsanto Company (MON) soared to a record 52-week high after releasing a … Read More

A Hot Sector of the Market I Feel Will Soon Be a Buy Again

By for Profit Confidential

Why Action in 3D-Printing Stocks Is Healthy for This MarketEverything in the stock market experiences its own cycle of enthusiasm among investors. And this is especially well illustrated among speculative issues.

There was a time only a few years ago when some of the hottest speculative stocks were in solar energy. Now this small equity universe is still trying to rebuild itself.

And in more recent history, 3D-printing companies experienced incredible capital gains, only to experience incredible capital losses in what is a commonality among the market’s most speculative stocks.

At the end of the day, high-flying positions are still real businesses that have to deal with managing their own business conditions and hype among institutional investors.

As an investor, you have to consider both realities—the growth an underlying business is experiencing and the enthusiasm the marketplace has for such an enterprise or sector.

Twelve months ago, 3D Systems Corporation (DDD) was trading at $44.00 a share. Then it appreciated to a high of $97.28, before spending most of this year retreating to the $50.00-per-share level.

It’s only recently that the position broke the $55.00-per-share barrier, still sporting a forward price-to-earnings ratio of approximately 46.

Fervor for speculative stocks definitely diminished at the beginning of this year, and it’s part of the cycle that equities perpetually experience.

At the beginning of 2013, the breakout was in large-cap blue chips. Institutional investors had just started buying these stocks, and they led the broader market higher.

Then the NASDAQ Composite began to improve and actually took the lead for a while. But even with the Federal Reserve onside, it didn’t take too long for big investors to just book some profits. … Read More

What Do This Quarter’s Mixed Earnings Results Mean?

By for Profit Confidential

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible.

While earnings are managed, over time, a business can’t manufacture success unless it’s a fraud (which, sadly, does happen).

Big companies have the operational leverage and the cash to keep boosting their earnings per share. Oracle’s latest financial results were uninspiring, and while recognizing that this is a very mature business with growing competition in the cloud, the position advanced a material 10 points since last June—this seems so overdone…. Read More

Flight to Safety Rewarding These Top Stocks

By for Profit Confidential

Investors' Flight to Safety Putting These Stocks on TopMy dad is earning a few percentage points on his fixed-income yields. Fortunately for him, that’s sufficient to live on when combined with his monthly pension and savings. He has no mortgage and lives a pretty normal, but somewhat frugal life.

In fact, Dad has always favored the fixed-income market for his investments as he doesn’t like risk. But for many Americans, the need for an ample flow of income during your retirement is a necessity for surviving, especially if the Great Recession wiped out your 401(k).

With the 10-year bond yield languishing below three percent, it would be difficult to live on this income, unless you have sufficient bond holdings or other avenues of income, like my dad’s pension. Having a more frugal or cost-conscious lifestyle also helps for many in retirement.

Yet the one area that I feel has been extremely positive for investors over the past five years is the dividend paying stocks that provide far higher yields and preferred tax treatment versus bonds. My dad may not be open to dividend paying stocks, but it makes sense for many other investors.

In reality, the Dow Jones and dividend paying stocks have returned some impressive capital gains and income over the past years. I expect this to continue in the current investment climate, where the stock market is favoring less risk.

Take a look at the Dow Jones Industrial Average (DJIA), which is slightly in positive territory, but at the same time, laying out income via dividend paying stocks.

The income stream has also been inviting with the average dividend yield on the 30 Dow blue-chip dividend … Read More

A Stock Market Break? These Indices Say No

By for Profit Confidential

These Turning Indices Show How Stocks Can Go HigherThe great monetary expansion is still alive and well and the effect on equity securities continues to be profound.

But what I find striking about the stock market’s continued advancement is that it’s blue chips that are pushing through to new record highs.

Speculative fervor in several sectors has diminished, but hasn’t completely disappeared. But it’s the big brand-name companies—a lot of which pay dividends—that just keep on trucking as institutional investors buy earnings safety and outlook reliability, and are betting on revenue and earnings acceleration going into 2015.

Union Pacific Corporation (UNP), a benchmark railroad stock, just hit another new record high on the stock market, breaking through the $100.00-per-share level. It was $35.00 a share this time in 2010.

And this from an old-economy, industrial enterprise that is probably not on many investors’ wish lists.

Amazon.com, Inc. (AMZN) broke down considerably at the beginning of the year when it was trading around $400.00 a share. It recently broke $300.00 a share, but has bounced back significantly and the position looks to be fighting hard.

And this is one of the speculative stocks on which investors booked their profits. This stock is on the comeback trail and so are Cisco Systems, Inc. (CSCO), The Priceline Group Inc. (PCLN), Oracle Corporation (ORCL), Apple Inc. (AAPL), and Google Inc. (GOOG).

The stock market has been digesting continued mediocrity in domestic economic data and slightly more positive numbers from China. Institutional investors are buying. I think that, in the absence of some kind of shock or new catalyst, the stock market can slowly keep grinding higher. It could very well turn … Read More

Eight “Super Stocks” for a Slow-Growth Market

By for Profit Confidential

How to Build a Portfolio for a Slow-Growth MarketWith stocks still ticking higher, portfolio safety and a strong adherence to risk management is key with the major indices pushing their highs.

Speculative fervor has come out of this market, but really only in the form of profit-taking. In order for stocks to experience a major price correction (which I view as a healthy development for the longer-run trend), the market requires a catalyst, and there isn’t an obvious one right now.

While individual stock selection is always important in portfolio management, generally, share prices move commensurately with each other based on sentiment. Accordingly, investors who own dividend-paying blue chips are just as well positioned if the broader market delivers more capital gains. And at a lot less investment risk to boot.

At the beginning of last year, in these pages, I put together a list of “Super Stocks”—the names of companies that I thought could be welcome in all but the most conservative of portfolios.

A lot of these positions are pushing their highs again. These stocks are back in favor with institutional investors and most have increased their dividends. (See “Super Stocks—Great Companies for Any Stock Market Portfolio.”)

The three positions that have been disappointments are Bunge Limited (BG), The Procter & Gamble Company (PG), and International Business Machines Corporation (IBM).

Bunge is heavily weighted to the agriculture sector, and as every commodity continues to prove over time, pricing, supply, and the business in general are volatile.

Procter & Gamble has a great dividend and that’s what is keeping investors interested. It’s just a very slow-growth story, being so global and mature.

I always follow … Read More

Three Blue Chips Set to Drive Higher

By for Profit Confidential

The Real Driving Force Behind Existing Winning StocksDespite a difficult start to the year, countless positions recently turned higher, even among slow-growth names.

E. I. du Pont de Nemours and Company (DD) is a company currently trading around 14 times its forward earnings, offering a 2.6% dividend yield. The stock just broke out of a three-month price consolidation.

This is the way the equity market has been trading since the March 2009 low. No big corrections, just consolidations of various durations. It’s a good reminder of just how powerful monetary policy can be (right or wrong) and that a company’s shares price is a relative valuation or bet on the future.

Du Pont has appreciated approximately 23% over the last 12 months, and this doesn’t include dividends paid. Year-to-date, the return is just less than seven percent.

The company’s sales in the first quarter of 2014 were down slightly compared to the same quarter of 2013 and earnings were cut in half.

The company experienced one percent lower volume, one percent lower selling prices, and a one percent adverse currency impact, comparatively. Yet the stock just keeps ticking higher. This time last year, the position was trading around $55.00 a share; now it’s $70.00.

One research firm recently increased its earnings estimate on the company for all of 2014, but like so many other blue chips, it’s the expectation that sales growth will accelerate in 2015, and this is seemingly the bet by investors.

Du Pont didn’t have a good first quarter, and its top operating division—agriculture—actually produced a six-percent drop in segment sales compared to the first quarter of 2013.

Two key themes seem to be … Read More

Rising Earnings Estimates the New Catalyst for Stocks?

By for Profit Confidential

Where Street Estimates Pointing 2015No doubt, trading volume for a lot of stocks has been on the decline, and while this is traditionally a sign of a market that’s topping out, this potential outcome would be well-deserved and no surprise.

It’s the lull between earnings seasons and the beginning of summer trading action. Volume is going to be lighter, and stocks are due for a correction—even a big one. So I don’t think this market is running out of gas; it’s just tired and investors are looking for catalysts.

Following earnings forecasts, old-school technology stocks like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) are seeing their estimates going up for 2015. And Wall Street’s even nudging estimates for the financials higher.

Even if stocks are tired and volume is declining, rising estimates for next year is a positive trend.

As most blue chip corporations did OK in the first quarter of 2014 (see “1Q Earnings Not Giving the Market the Boost It Needs”), one commonality among many multinational companies was improving business conditions in Europe. It will be very interesting to see if this trend holds during second-quarter reporting. If it does, it increases the likelihood that multinational businesses will see their 2015 earnings estimates nudged higher yet.

Street estimates for Caterpillar Inc. (CAT), which is a very international business, have been going up across the board for this year and next. While the market expects total sales to be basically flat in 2014 (compared to 2013), current consensus is for around six-percent sales growth in 2015.

And there’s a similar scenario with other Dow Jones stocks like Cisco Systems, Inc. (CSCO) … Read More

Top Stocks Poised for More Gains in Slow-Growth Market?

By for Profit Confidential

Best Stocks World Slow GrowthThe thing about large-cap investing—and most stock market investing, in general—is that periods of capital gains are often met with long periods of non-performance.

A great investment with a long history of making money for stockholders is Johnson & Johnson (JNJ). But even this blue chip pharmaceutical/consumer products company has experienced long periods with nearly no capital gains (1975 to 1985 and 2002 to 2012, in recent history).

Action in the broader market is a big reason for non-performance of individual companies. The Procter & Gamble Company (PG) acted similarly on the stock market during the same period.

Back in 2000, the company had a quarterly earnings miss during the height of the technology bubble. The position was cut in half and took five full years just to recover.

That stock market experience is a good reminder that even so-called “widow” and “orphan” blue chip stocks are susceptible to major share price volatility and non-performance. (See “Blue Chip Stocks Expensive at This Point.”)

And depending on your time horizon for investment, the market cycle has a tremendous influence on total equity returns.

It also illustrates that investment risk with stocks, even the most stable of businesses, will always be inherently high due to the fact that prices are determined by a secondary market system (i.e. non-private ownership).

Therefore, given the perpetual cycle of volatility and only relative pricing of stocks at any given time, one of the single most important factors influencing total equity market returns is dividends. And their importance and percentage weight comprising total market returns grows significantly with duration.

Also illustrative in the stock market’s … Read More

« Older Entries
Financial Reports
Enter your e-mail address to subscribe to
Profit Confidential — IT'S FREE!
Enter e-mail:
ALSO RECEIVE A FREE COPY of our exclusive report:
"A Golden Opportunity for Stock Market Investors"