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

Posts Tagged ‘blue chips’

Market Dynamics Changing; Where’s the Upside for Investors?

By for Profit Confidential

Why Beating the Street Isn’t as Good as Real ValueBeing financial reporting season, it’s important to discern between results that beat Wall Street consensus and real economic growth.

Abbott Laboratories (ABT) just announced better-than-expected first-quarter earnings, but they weren’t better than the comparable quarter of 2013. Operating earnings, earnings from continuing operations, and diluted earnings per share were all down significantly compared to the first quarter of 2013.

So, the illusion can definitely become real in hot markets. Investors are always better off ignoring headlines and going right to the financial statements. Managed earnings are just that—managed.

One company that just produced a very good quarter was The Charles Schwab Corporation (SCHW). The stock broker’s first-quarter sales grew 15% to $1.48 billion on strong growth in asset management and administration fees.

Net earnings leapt 58% to $326 million, or 60% to $0.60 in diluted earnings per share. Top-line growth and strong expense control were the reasons for the strong bottom-line growth.

There’s no real reason why Charles Schwab’s share price should keep on appreciating near-term. All the good news is priced into the shares. The company beat consensus earnings by $0.02 a share, while revenues were in line.

This reporting season, earnings are here to justify current share prices.

I’d be very wary of buying corporate good news now. Market jitters aren’t going away and all it takes is a small catalyst for institutional investors to pull the sell trigger again.

A meaningful correction or price consolidation would be a positive development for the longer-run trend and a good opportunity to consider adding to blue-chip positions.

A good deal of speculative fervor has come out of this market, … Read More

Why Economic Growth Doesn’t Guarantee Rising Share Prices

By for Profit Confidential

Why Today's Earnings Are for Yesterday's Stock PricesTrading action in stocks has been all over the map so far this year, while investor sentiment remained generally positive. The fact that there was a bunch of profit-taking after the solid recovery in February and March is neither a surprise nor unnatural for a market at a high.

The Federal Reserve continues to be more than accommodative to Wall Street with its words of comfort and its willingness to provide continued monetary stimulus past previously stated benchmarks.

Near-term, geopolitical events in Ukraine are likely the biggest risk for stocks. It’s been a slow start this earnings season with unremarkable results, but the numbers aren’t that bad. Growth is growth.

The NASDAQ Biotechnology Index has just now crossed its 200-day simple moving average, if that’s meaningful. It’s done so several times over the last five years and recovered after a period of consolidation.

Biotechnology stocks aren’t worth paying a lot of attention to in terms of portfolio strategy. These risk-capital stocks trade on their own unique set of business fundamentals. They’ve been powerhouse wealth creators for sure over the last few years. They are due for an extended break.

I think the best plays in this market are still with dividend-paying blue chips as they experience price retrenchments. These stocks continue to have a tremendous amount of favor with big investors in a slow-growth environment. Dividend income is very important when top-line growth is in the single digits.

For those equity investors wanting to take on positions in this market, I’m still a fan of existing winners, particularly among the brand-name stocks that have distinguished themselves with long track records … Read More

Four Companies to Watch as Stock Prices Reset

By for Profit Confidential

Resetting of Equity Assets Next Leg in Stock Market's CourseThe significant price reversal in biotechnology stocks is very meaningful and appropriate, considering the massive capital appreciation the sector provided over the last three years.

There’s a reset going on with stocks, even with the Fed still onside. Earnings are not expected to grow that much in the first quarter of 2014, and big investors are booking profits as investment risk for both new and existing positions is going up.

This has been a very tough market for buyers, as stocks have already gone up in anticipation of decent earnings and revenue growth. There is very little in the way of value for investors, and there hasn’t been for a while.

This choppy action is a good reason not to get complacent when stock market indices are hitting new records. As prices go up, so does investment risk. Portfolio risk management is more important than the expectation for potential returns with stocks. Price trends easily last beyond reasonableness, but as history proves, the bubbles do eventually burst.

Right now is a great time to be reevaluating portfolio risk and identifying great stocks that you’d like to own if they were much better priced. (See “Risk vs. Reward: Is It Time to Cash Out of This Bull Market?”) There’s no reason to be a buyer in a market right near its highs with slowing expectations for growth.

One company that I think is worth having on your radar now is NIKE, Inc. (NKE); a position appropriate for long-term portfolios.

This stock experienced a substantive run up over the last five years, but with this in mind, the stock is … Read More

What These Two Companies Suggest About the Trend in Employment Payrolls

By for Profit Confidential

These Two Companies Suggest Trend in Employment Payrolls RisingEarnings season is here and a number of companies have already reported. Some offer more useful information about the general economy and their earnings are a decent barometer.

Paychex, Inc. (PAYX) is the second-largest U.S. payroll company. It just beat Wall Street consensus on revenues and earnings.

The company said its fiscal third quarter of 2014 (ended February 28, 2014) saw revenues climb seven percent to $636.5 million, which is a very healthy comparable gain.

Payroll service revenues grew five percent to $413.9 million, based on growth in checks per payroll and revenues per check. Human resource service revenues improved 12% to $212.1 million due to client-based growth.

This produced a gain in bottom-line earnings of 11% to $160.1 million comparatively. Diluted earnings per share grew 10% to $0.44, up from the comparable figure of $0.40. Paychex reiterated existing revenue guidance for fiscal 2014. Earnings are expected to be higher than previously forecast.

Decent growth at payroll companies is a positive sign. With an attractive dividend yield of approximately 3.3% currently, this stock has room to tick higher if the broader market doesn’t come apart.

Paychex’s one-year stock chart is featured below:

PAYX Paychex ChartChart courtesy of www.StockCharts.com

Automatic Data Processing, Inc. (ADP) is slightly more than double Paychex’s market capitalization.

This large-cap is trading only a few points from its all-time record-high, and it currently has a 2.5% dividend yield.

The company doesn’t report its next set of earnings until April 30, but in its second fiscal quarter of 2014 (ended December 31, 2013), total sales climbed nine percent to $3.0 billion. (See “Stocks: Why I’m Starting to Favor the Read More

NASDAQ, Russell 2000 Signaling Buying Opportunity Ahead?

By for Profit Confidential

Why I'm Concerned About the Stock Markets Near-TermFolks, I’m beginning to get somewhat concerned about the stock market in the near-term. I’m not saying the stock market is going to crash, but there are some technical indications of a possible correction or adjustment in the near-term.

The S&P 500 recently traded at a new intraday record, but the key stock market indices have declined in three of the last four sessions. What makes matters worse is that the downward slide in the stock market was associated with higher-than-average trading volume, which is a bearish indicator in technical analysis, as it suggests a pick-up in selling momentum.

We all know that momentum can be good or bad depending on which way the stock market is going and whether you long or short the stock market.

What concerns me is not only what’s happening in Crimea and the concerns regarding the Federal Reserve’s recent actions, which I have previously discussed. (Read “The Stock Market Needs to Do This in 2014 Before I Invest More in It.”) Rather, what really concerns me is that we are now seeing a breakdown on the charts of the momentum technology stocks that had helped to drive up past euphoria in the stock market. We are seeing many of the high-momentum stocks fall by 10% or more. This suggests fragility and a potential downward slide coming up for the broader stock market.

Also, the disappointing initial public offering (IPO) debut of King Digital Entertainment plc (NYSE/KING) Wednesday was a red flag; it suggests that the IPO market may be losing some of its recent appeal or that traders are simply nervous about … Read More

Does Risk Trump Returns in This Stock Market Environment?

By for Profit Confidential

Why Risk Now Trumps Stock Market ReturnsGoing by the choppy trading action this year, investment risk with equities is going up.

Recent shocks to the system include events in Ukraine and Crimea, Chinese economic data, and Citigroup Inc.’s (C) failed stress test.

This is a very uneasy stock market, and because the main indices are right around their highs, any shock has the potential to deliver a serious haircut to asset prices. The choppy, trendless action combined with full valuations is the reason why I’ve been advocating taking profits from speculative positions. This stock market is just plain tired out.

First-quarter earnings season is just around the corner, and while it’s looking like we’ll get more of the same from corporations (a meet-or-beat on only one financial metric, revenues or earnings) the stock market needs more than dividends and share buybacks in order for share prices to keep appreciating.

Blue chips, especially, have been coasting along, providing single-digit earnings growth on modest sales. The icing on the cake has been the rising dividends and share repurchases, which the stock market has eaten up over the last two years.

But sentiment is slowly changing regarding share repurchases. Big investors want to see more than these financial tools in the businesses they own. Rising dividends are always great, but you need underlying revenue and earnings growth to sustain the case. And in order to do so, corporations have to make new investments. They’ve been very reticent to date.

Healthy balance sheets are always desirable, but new business investment and innovation is what creates wealth over the long-term. Everything’s been short-term thinking the last few years, and companies … Read More

Risk vs. Reward: Is It Time to Cash Out of This Bull Market?

By for Profit Confidential

Time to Cash Out of This Bull MarketEver since Janet Yellen, the new Chair of the Federal Reserve, made her first speech reiterating a stay-the-course policy regarding monetary policy, stocks got a whole new lease on their financial life.

This market is holding up extremely well, and the action proves that institutional investors will bid stocks if there is certainty. It’s a bull market characteristic. So long as Fed policy stays the course (which includes the tapering of quantitative easing) and there are no major external shocks, the “great reflation” should continue, if not more modestly than last year. (See “Making Sense of the U.S. Economy in 10 Short Points.”)

Fighting the Fed as an investor in stocks is typically not profitable. The current business and monetary cycles are going to change, but it’s not going to happen overnight.

The first quarter of 2014 is almost over and another earnings season is on the horizon. While quarterly earnings results are managed, after monetary policy, corporate numbers are the big news.

Playing a market that’s at an all-time high is extremely difficult. Price momentum can often surprise with its duration, especially in an environment of tremendous monetary ease.

But practically, it’s difficult to consider loading up on new positions after a five-year period of very respectable capital gains from the March low in 2009.

Optimism is a key attribute for any successful entrepreneur, and the expectation for positive outcomes is most certainly a real component of capital markets, especially with stocks.

My sense is that first-quarter earnings results will be quite lackluster, with domestic companies especially reflecting a tough winter.

Buying stocks is all about the … Read More

Contrarian View: Is the Bull Market Really Just Beginning?

By for Profit Confidential

Did the Current Bull Market Really Start in 2013There is some resilience to this stock market, and it’s evidenced by the strength in many important indices.

The Dow Jones Transportation Average is a very important index, even if you don’t own—or aren’t interested in owning—any component companies. The reason for its importance is that it has a track record of leading the rest of the stock market. And it’s especially useful as an indicator of a bull market breakout.

Transportation stocks have a history of leading the economy and the stock market. Dow theory, in my view, is alive and well, and it’s worthwhile to track the index to help with your overall market view.

Lots of commentators view the stock market as having been in a bull market since the March low of 2009. I don’t see it that way.

I view the stock market’s performance since that low (no matter how it was induced) as a recovery market, not the beginning of a new secular bull market or cycle for stocks.

The breakout, from my perspective, was around the beginning of 2013, when institutional investors ignored all the risks (including the inability of policymakers to actually make policy) and decided to bid blue chips and transportation stocks with particular fervor.

The previous stock market cycle was a 13-year recovery cycle from the technology bubble that produced over-the-top capital gains until 2000. The stock market recovered from the massive sell-off only to be hit by the financial crisis and Great Recession.

A long-term chart of the S&P 500 is featured below:

$SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Last year’s stock market performance was genuinely stunning; while the monetary … Read More

This Blue Chip Keeps Bouncing Back

By for Profit Confidential

This One Stock Keeps Bouncing BackAmong blue chips, Johnson & Johnson (JNJ) remains one of the most attractive enterprises for long-term investors.

As a benchmark stock within the entire equity universe and a conglomerate itself of healthcare businesses, it’s reasonable to expect a stock like this to provide a normalized annual return of approximately 10% including dividends.

Johnson & Johnson isn’t typically down for long on the stock market, and most recently, the stock popped higher after dropping to $86.00 a share.

The position’s been toying with $95.00 a share, and this is a ceiling for the stock, according to its recent trading action over the last couple of quarters. If the broader market holds firm, $100.00 a share by year-end would be a fair and attainable price target.

While not robust, earnings have caught up to share prices for many blue chips and countless positions are not overpriced.

Johnson & Johnson has a trailing price-to-earnings (P/E) ratio of approximately 19.5 and a forward P/E ratio of around 15. Because of the company’s stellar long-term returns to shareholders, it’s kind of like a golden blue chip, as very few companies have been able to produce such decent and consistent operational growth in their businesses.

Johnson & Johnson’s long-term, split-adjusted stock chart is featured below:

JNJ Johnson & Johnson NYSE Chart

Chart courtesy of www.StockCharts.com

All blue chips, even those with increasing dividends, experience periods of non-performance, but often to a lesser degree than the broader market. While not offering robust growth, the stability of an enterprise like this company provides peace of mind, in addition to the high likelihood that dividends will increase in the future and that demand for … Read More

Three Steady Stocks to Balance High-Flyers & Boost Your Returns

By for Profit Confidential

Solid Portfolio Needs Some Steady Growers Like These Three StocksLots of companies are still reporting their financial results, and there are a lot of unique stories out there that are worth following.

AAON, Inc. (AAON) reports this week. We’ve looked at this enterprise several times before in this publication. Company management has an impressive track record of generating consistent growth.

It will be interesting to see if the company can keep its operational momentum. (See “Why This Company Should Be a Case Study in Business Schools.”) Over the medium- to long-term, it’s proven unwise to bet against this well-managed business.

Last year in these pages, we briefly highlighted a very interesting medical device company called Globus Medical, Inc. (NASDAQ/GMED). Based out of Audubon, Pennsylvania, the company specializes in the treatment of spinal disorders and is building its business in a very consistent and methodical way.

The stock stumbled in the fourth quarter of 2012 but has been moving solidly higher as management delivers modest but consistent growth in revenues and earnings.

The company’s two-year stock chart is featured below:

GMED Globus Medical, Inc. NYSE Chart

Chart courtesy of www.StockCharts.com

Stocks with consistent share price performance are golden, and it comes on the back of consistent operational growth. It doesn’t have to be runaway growth or even double-digit growth; institutional investors love medical device stocks, and they will bid them as long as a company delivers on expectations.

Any stock can break down at any time for a multitude of reasons, but I’ve seen so many consistently returning stocks produce better capital gains (over a longer period of time, of course) than many high-flyers.

It’s not that high-flying trades aren’t worth pursuing; rather, within … Read More

Former Momentum Stocks Signpost to Sell?

By for Profit Confidential

Price Momentum Suggests Portfolio RebalancingA good amount of speculative fervor has come out of this market so far this year, but there’s still quite a bit of valuation froth around.

Across the board, 3D-printer stocks have come back. 3D Systems Corporation (DDD) still boasts a trailing price-to-earnings (P/E) ratio of around 150.

Tesla Motors, Inc. (TSLA) is still going strong. It’s one of few super-hyped stocks that made a strong recovery in January after a material sell-off months before. (See “Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?”) The position just bounced off $265.00 per share. Next year, Wall Street estimates the company will do more than $5.0 billion in sales.

Looking at the stock market currently, there’s a lot of indecisiveness and geopolitical events are overshadowing the action.

Watch large-cap biotechnology stocks (or the NASDAQ Biotechnology Index) for their trading action specifically. This group of stocks reaccelerated strongly in February and is very much overdue for a material correction.

I’ve noticed several key momentum stocks within the group have started rolling over. This should be a strong contributing indicator to the short-term action unrelated to specific events happening in Ukraine.

Gold is holding up well with the geopolitical tensions, and oil prices are too, but to a lesser degree.

Stocks are due for a break. What looked like the makings of a material correction in January, equities reversed direction after the Federal Reserve, once again, reiterated its willingness to be highly accommodative to capital markets.

This kind of market (after such a strong 2013 for stocks) warrants a significant degree of caution. I wouldn’t be jumping onto any bandwagons. … Read More

The Dividend-Paying Blue Chips That Also Deliver Significant Capital Gains

By for Profit Confidential

Two Blue Chips to Snatch up When They're DownAmong the many lessons to be learned by 2013’s stunning stock market performance, one is that dividend-paying blue chips can also experience significant capital gains.

Portfolio strategy can be based on blue chips, but it can also include companies with varied market capitalizations; mixing it up is always useful.

The thing with blue chips is that they often experience long periods of underperformance, even if they are still paying their dividends. Periods like 2013 are pretty rare, but I do think there is enough momentum in this market to carry blue chips a little higher, with gains more likely towards the end of the year.

I still feel that existing winners, especially larger-cap companies that offer dividend income, are the way to go in a slow-growth environment. Top-notch balance sheets, including huge cash balances and the very low cost of capital are a boon to big companies.

The bears are always looking for reasons why stocks should go down, but blue chips have the pricing power and the economies of scale to keep earnings afloat.

Management teams are reticent to make bold investments in new plant and equipment, and the trend of keeping shareholders happy with increasing dividends and share repurchases shows no sign of abating. These are good markets for conservative investors.

The Walt Disney Company (DIS) is one of many blue chips that are worthy of consideration when they’re down. According to this stock’s historical track record, it isn’t down for long. The company’s recent stock chart is featured below:

DIS Walt Disney Co. NYSE Chart

Chart courtesy of www.StockCharts.com

Disney recently dipped to $70.00 a share when the broader stock market retrenched in … Read More

What the “Microsoft Indicator” Says Now

By for Profit Confidential

Microsoft the Best Market Indicator at This TimeEarnings estimates for Microsoft Corporation (MSFT) are going up and the stock, which recently accelerated, finally looks like it has broken out of a 13-year consolidation.

Microsoft has been an income play for quite a while. Currently yielding three percent, the company’s forward price-to-earnings ratio is around 12.5 and is not dissimilar from many other blue chips.

Then there’s Intel Corporation (INTC). This company has been struggling for capital gains, but it’s yielding 3.6% and isn’t expensively priced.

What these technology companies illustrate so well is the business cycle, both in terms of operational growth and also as equity securities. Getting the cycle correct (the right place/stock at the right time) is the toughest thing for any investor or businessperson.

Regarding stocks, both Microsoft and Intel’s long-term charts clearly show how extremely overpriced their share prices were during the bull market of the 90s. Intel’s long-term stock chart is featured below:

INTC Intel Corp. Nasdaq GS Chart

Chart courtesy of www.StockCharts.com

The benefit of the very long term is that it provides a normalized but still decent rate of return with these kinds of stocks. No enterprise or investor can escape the business cycle, whether it is industry-specific, a local reality, or the general economy.

Railroad stocks have been super hot over the last several years, but for long periods of time, they were not. The solid dividend-payers that they are, you’d be hard-pressed to find Union Pacific Corporation (UNP) competing with Apple Inc. (AAPL) or Google Inc. (GOOG) for headlines.

I feel that stocks have broken out of their previous consolidation phase in favor of a new long-term cycle. But while last year’s stunning … Read More

If This Indicator Turns, the Stock Market’s in Trouble…

By for Profit Confidential

Factors Now Creating a Positive Backdrop for This Stock MarketWith the stock market jittery due to geopolitical events, its underlying strength is highlighted by the relative outperformance of the NASDAQ Composite, the Dow Jones Transportation Average, and the Russell 2000. If these indices are doing relatively better than the S&P 500 and Dow Jones Industrial Average, then there is still an underlying strength to a market that hasn’t experienced a material correction for far too long.

The stock market has done a very good job of recovering from January’s sell-off. Certainty from the Federal Reserve, fourth-quarter earnings results that were modest but mostly met expectations, and strong corporate balance sheets are providing a decent fundamental backdrop. The stock market can have another decent year if it isn’t sidetracked by some sort of lasting shock.

The other indicator that is not directly related to the stock market but certainly is worth taking note of is the spot price of oil. Oil prices have been holding quite solidly above the $100.00-per-barrel level.

Stronger oil prices are a reflection of their own specific fundamentals, but they’re also a barometer or gauge on the part of speculators regarding future economic activity. The spot price has brought back a lot of oil stocks that recently sold off and valuations are creeping up close to previous levels (which was very expensive for Bakken oil stocks).

I maintain a positive outlook for the stock market given current fundamentals and recognize, of course, that geopolitical events can turn investor sentiment on a dime. If the stock market were to experience a substantial price correction right now, I would view it as a buying opportunity.

Earnings estimates for … Read More

Should Your Portfolio Strategy Focus on Geopolitical Events?

By for Profit Confidential

Are Geopolitical Events Now the Catalyst for StocksStocks have been choppy since the beginning of the year and geopolitical events are now the near-term catalyst.

It’s a good reminder that it’s worthwhile to review investment risk to equities and what you can tolerate in terms of potential downside with stocks.

As these pages are focused on the equity market, investment risk is always a priority. Portfolio risk can get lost in a bull market, but it’s still a huge part of the equation in terms of overall strategy.

There’s just so much beyond your control as an individual investor. At the end of the day, with stocks, it’s an investment in a business commensurate with a bet that its per-share worth (which is only definitive in the event of a buyout) will be recognized by a marketplace ruled by fear, greed, and emotions.

In late 1999, The Procter & Gamble Company (PG) had an earnings miss and the stock was basically cut in half, as the hype related to technology stocks was coming apart. It took five full years for Procter & Gamble’s share price to recuperate from the sell-off; and while the company was still paying its dividends, that’s a long time for any equity investor.

Stocks always correct themselves eventually, but excessive pricing (like in other asset classes) can last for quite a while. Procter & Gamble’s long-term stock chart is featured below:

PG Procter Gamble Company Chart

Chart courtesy of www.StockCharts.com

In terms of portfolio strategy related to stocks, a multi-faceted investment strategy is key. This means varying holdings among industries, stock market capitalizations, dividend paying stocks, and pure-play bets.

An individual investor certainly doesn’t have to be the … 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"