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

Posts Tagged ‘earnings growth’

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

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

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

As Stocks Brush Off Geopolitical Tensions, Here’s the Catalyst for a Correction

By for Profit Confidential

Where's the Catalyst for Correction in StocksCountless stocks are bouncing off their highs, and in many cases, a lot of these companies are due for share splits.

It’s a peculiar environment for investors in that the main market indices are right at their highs, yet the Main Street economy isn’t performing anywhere near as well.

Stocks are a leading indicator and share prices move in advance of anticipated corporate earnings, but it’s so difficult to be a buyer when most stocks have already gone up like they have. It’s not boom time at all in the real world.

So with this backdrop, I think it’s fair to conclude that an investor has to be extremely careful in the current environment.

I view investment risk in equities as being high because stocks are at their highs and Main Street is stagnant. It’s not a good combination. And with the real possibility of rising interest rates later this year or early 2015, the boom that hasn’t happened could easily turn into a bust.

For an investor looking to buy stocks right now, I would say to wait until second-quarter reporting season begins and we get the latest numbers from corporations before investing.

This market is so badly due for a material price correction, and with the right catalyst, it could happen near-term.

Given the current information, I would view a material price correction as a buying opportunity. A real stock market correction has eluded us for too long since the March of 2009 low.

And while there was a small sell-off at the beginning of this year, stocks have been moving consistently higher for two straight years.

I … Read More

Why We Are Closer to a Recession in 2014 Than You Think

By for Profit Confidential

U.S. Economy to Fall into a Recession This QuarterDon’t buy into the notion that there’s economic growth in America!

We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)

As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.

Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)

And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.

The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.

But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.

 30 Year t Bond Yield Chart

Chart courtesy of www.StockCharts.com

If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?

From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.

Dear reader, the perfect … Read More

About That Economic Mirage We Are Living Today

By for Profit Confidential

U.S. Economy Contracts in First Quarter of 2014. Someone Tell the Stock Market!Dear reader, yesterday we got the news that the U.S. economy “unexpectedly” contracted by one percent in the first three months of this year. This is the first time since the first quarter of 2011 that the U.S. experienced negative growth!

This news should come as no surprise to my readers, as I’ve been writing for months how my research shows the U.S. economy is slowing. Most obviously, U.S. companies had a terrible first quarter in respect to earnings growth. In respect to revenue growth, it’s nonexistent.

So why is the stock market rising? Well, it’s not really rising; it’s an illusion. Yes, we keep hearing in the news how the stock market is breaking to new highs. But if we look at the Dow Jones Industrial Average, it’s up only one percent so far in 2014. The Russell 2000 Index (a broader gauge of the market) is actually down 2.5% for the year.

And the money going into buying stocks is actually collapsing. In the first five months of this year, the volume on the S&P 500 was the lowest since 2007!

When you have a stock market rising on weaker and weaker trading volume, it’s a very dangerous stock market. In fact, in the last two months (April and May), there hasn’t been a day when volume on the Dow Jones Industrial Average was more than 500 million shares. In 2013, there were only seven days when the volume on the Dow Jones Industrial Average was less than 500 million!

The rising (or should I say “holding-its-own”) stock market has convinced the media, economists, government, and investors that … Read More

The New Land of Oz

By for Profit Confidential

When Gold Will Finally BottomYesterday was an amazing day for the markets.

Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.

The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.

In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:

“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.

“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.

“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE … Read More

How to Find a Solid Stock Investment in a Market Lacking Value

By for Profit Confidential

Two Solid Stock Investments Market Lacking ValueThere’s not a lot of value around in this stock market, and it’s difficult to be a buyer when a lot of stocks have already done extremely well the last few years. However, this isn’t the case for all stocks.

One company I’ve looked at before in this column is Chart Industries, Inc. (GTLS) out of Garfield Heights, Ohio.

This stock has come way off its high on slower-than-expected business growth. But this is still a very good business with barriers to entry and good long-term fundamentals.

The company, which manufactures storage solutions for hydrocarbons and industrial gases, just got another contract with a Chinese energy customer. The company will build and commission 50 permanent liquefied natural gas (LNG) fuel stations within the next 30 months. Management estimates the sales will be worth upwards of $35.0 million.

Chart Industries was doing extremely well on the stock market up until last October. The position hit $130.00 a share, but is now trading around $75.00.

Even if recent results didn’t quite live up to expectations, this is still a growth business and the company has a very bright future in its specific industry.

Another enterprise that’s come off its high and is still a growing company is A. O. Smith Corporation (AOS), which is based in Milwaukee.

This business manufactures water heaters. On the surface, that might not seem like the greatest of enterprises, but it actually is. The company’s business strategy was founded in the domestic water heater market, but it now has a growing presence in China and sales are gaining at a very good clip.

The first quarter of … Read More

The Only Place to Put New Money in Today’s Economy

By for Profit Confidential

Invest New Money During a Stock Market's HighA lot of stocks are rolling over, breaking their 50- and 200-day simple moving averages (MAs). This is a tired market that could very well consolidate or correct right into the fourth quarter.

And the economic data has been softer, as well. Throw in geopolitical tensions with Russia and we have the makings of a material price retrenchment.

There’s still resilience, however, in some of the most important stock market indices. Stocks composing the Dow Jones Transportation Average are holding up extremely well, especially compared to the Russell 2000, the NASDAQ Biotechnology index, and the NASDAQ Composite index itself.

While the main market indices are mostly flat on the year, I don’t think investors can expect any capital gains until perhaps the fourth quarter.

From my perspective, relative price strength in the Dow Jones industrials, transportation stocks, and most of the S&P 500 index means that the longer-run uptrend remains intact.

With speculative fervor still coming out of initial public offerings (IPOs) and select biotechnology stocks, this action is an indicator of a tired market that’s long in the tooth, as investors are clearly less willing to speculate on those stocks that don’t offer income or relative safety in their earnings.

Risk aversion won’t kill a secular bull market. But it does mean that risk-capital opportunities are a lot less plentiful. Currently, among speculative stocks, one of the only sectors still experiencing decent price action is oil and gas drilling and exploration.

This is still a market that I think favors existing winners—blue chips, in particular. (See “Top Stocks for the Coming Correction.”)

These are the stocks to … Read More

This Stock’s Earnings Report Most Valuable News for Investors?

By for Profit Confidential

According Stock There's  Bright Light U.S. EconomyA lot of earnings results from multinational corporations revealed improving growth in the international markets, including Asia and, surprisingly, Europe. But one company just reported the reverse and its first-quarter numbers were excellent based on strong domestic demand for its products.

Cummins Inc. (CMI) hit it out of the park with a 25% comparative gain in North American sales, while the company’s international sales were basically flat. Diluted earnings per share grew 23% in the first quarter of 2014; the company bought back three million of its own shares.

The company increased its full-year guidance based on improving domestic demand, and the stock soared on the news.

Citing lower demand for power generation and mining equipment, particularly in India and Australia, the weakness was offset by strong demand for engines (sales up 11% to $2.6 billion) and components (sales up 21% to $1.2 billion) in North America and to a lesser extent in Europe and China.

The company expects full-year 2014 sales to grow by six to 10% over 2013. This is new guidance, up from the previous expectation of sales growth between four and eight percent, based on improving North American demand.

A number of Street analysts boosted their earnings expectations for Cummins for 2015; the bottom line is expected to grow a little more than 20% (currently 17% for this year over 2013). That is very strong earnings growth for a $28.0-billion company in a mature industry.

Cummins’ 10-year stock chart is featured below:

Cummins Inc ChartChart courtesy of www.StockCharts.com

Every company and industry has its own particular set of circumstances, but it’s material what large manufacturing corporations say about … Read More

The Unavoidable Risk in Resource Investing

By for Profit Confidential

Oil Stocks Attractive Beware Unavoidable RiskThe spot price of oil has pulled back to the $100.00-per-barrel mark, but oil stocks are holding up extremely well and the price strength is almost across the board, from related services to the big integrated producers.

Earnings expectations for many within the oil group have been going up for this year and next, while valuations, even among fast-growing producers, aren’t generally overdone. Earnings have caught up to share prices over the last couple of quarters.

Not every investor wants to be in oil. But for those who do, the sector can be a key component of an equity portfolio. There’s a lot of income and capital gain potential with related businesses and plenty of options on how to play the industry.

One junior energy producer we’ve been looking at in these pages since early 2013 is Kodiak Oil & Gas Corp. (KOG). This is a highly liquid Bakken oil play and institutional favorite. The company reports after the market closes this Thursday; its news is material for oil and gas speculators.

Kodiak has a very good track record of generating significant production and financial growth. In the fourth quarter of 2013, the company’s oil and gas sales soared to $266.5 million, representing a comparable gain of 104% over the fourth quarter of 2012.

Average production of barrels of oil equivalent per day (boepd) grew to 36,100 in the fourth quarter of 2013, basically doubling the average boepd in the comparable quarter.

Kodiak’s total oil and gas sales in all of 2013 were $905 million for a gain of 121% over 2012. Earnings growth was less robust, as the company … Read More

The Economy: What Will Break the Camel’s Back This Year

By for Profit Confidential

Baltic Dry Index Collapses Again; Not a Good Sign for EconomyThe International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)

I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.

Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.

Battic Dry Index Chart Chart courtesy of www.StockCharts.com

Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.

The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)

Adding to the misery, most economic hubs are telling the same tale.

The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More

One-Third of S&P 500 Companies Report No Revenue Growth

By for Profit Confidential

Why This Is Such a Risky Stock MarketThose who follow the stock market closely know that on days when we hear the chairwoman of the Federal Reserve speak and she mentions something about “easing” or how the central bank will continue to use its “extraordinary measures” for a long period of time, the stock market jumps.

I’ve talked about this phenomenon many times in these pages. Another example of this happened on March 31, when the Fed chairwoman spoke in Chicago. Please see the chart below. It’s a minute stock chart of the S&P 500. I’ve circled a rough area around the time when Janet Yellen spoke.

 SPX S&P 500 Large Cap Index ChartChart courtesy of www.StockCharts.com

As she spoke more of that “easing” talk, the stock market jumped, as usual.

So it has come to the point where the stock market rises when it hears the Fed will keep interest rates artificially low for a prolonged period of time and when a poor jobs report comes out (like last Friday morning’s), saying jobs have been created in spite of the fact that there is a heavy concentration of jobs growth in low-paying sectors and millions of people have given up looking for work.

In other words, we have reached the point where the stock market takes any news as a reason to move higher; this is characteristic of a market top.

When we look at the fundamentals of the stock market, we see companies in the S&P 500 are using financial engineering to boost per-share earnings. These companies have bought back their shares and have been cutting costs to boost profits as revenue growth just isn’t there anymore.

The proof? In the … Read More

Top Wealth-Creating Stocks Defying Stock Market Sell-Off?

By for Profit Confidential

What Stocks Are Defying the Near-Term Stock Market TrendWith the broader stock market selling off, it’s amazing to see a company’s share price defy the near-term trend and appreciate in value.

Time and time again, Johnson & Johnson (JNJ) gets bid when the broader market faces convulsion. It’s a powerful signal, and there is still a great deal of angst among institutional investors; they still want those dividends and the relative safety of earnings that are predictable.

Johnson & Johnson has been—and continues to be—an excellent wealth creator. The stock’s been bouncing off $95.00 a share the last while and just recently, it seems to have broken past this price ceiling.

There’s not a lot new with this position. One Wall Street firm recently boosted its earnings expectations for the company in 2015. Sales growth is expected to be in the low single-digits this year, but annual earnings growth combined with dividends should be in the low double-digits once again. The company reports its first-quarter numbers on April 15.

There’s definitely been a change in investor sentiment regarding speculative positions. Biotechnology stocks, which have been the market’s multiyear winning sector have finally seen investors book profits. It’s been long overdue and from a market perspective, is a healthy development for the primary trend.

The selling migrated to large-cap technology names and the shakedown just might last a while longer. Anything can happen during an earnings season, but a “sell in May and go away” type of scenario is a real possibility again this year.

Other blue chip names that are also defying the market’s recent action include 3M Company (MMM), Union Pacific Corporation (UNP), Kimberly-Clark Corporation (KMB), Microsoft … 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

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