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

Posts Tagged ‘large-cap companies’

Keep Your Eye on This Lesser-Known Index

By for Profit Confidential

Eye on This Lesser-Known IndexA positive bias remains to current stock market action. Earnings are still modest, but for the most part, many are positive.

The S&P 500 Index did an excellent job recovering from a small (Federal Reserve/market-misread-induced) consolidation in June. Since the beginning of the year, the Dow Jones Industrial Average has led other key indices—that is until recently.

Major stock market indices have been usurped by the stunning performance of the Russell 2000 Index. When small-cap stocks start moving, it’s a powerful signal.

Strength in small-cap stocks reveals a lot of innate aspects in investor sentiment. It means that there is more speculative fervor and willingness on the part of investors to buy less safe names. It also means that the market expects improving business conditions from domestic businesses, as small-cap stocks typically aren’t as global as larger companies.

I’ve noticed a stock market trend over the last couple of quarters. Smaller technology companies have been reporting better financial results. But many of the positions I watch haven’t moved materially on the stock market until only recently. Perhaps there is some correlation to the performance of component companies in the Russell 2000.

Regardless, this index has been very strong over the last three weeks.

In the larger-cap space, many of the stock market’s biggest brand names are reporting decent earnings with mediocre sales growth. Once again, it’s looking like it’s going to be another quarter of one financial metric, either revenues or earnings, coming up short of Wall Street consensus.

The most important thing is stability of operations and meeting or beating one Wall Street estimate. That’s my read on how … Read More

What Companies’ Earnings Are Telling Us About Where the Market is Headed

By for Profit Confidential

Companies’ Earnings Are Telling UsMost large-cap companies are not reporting great earnings, and this makes sense. You can’t have runaway earnings in an economy with very slow growth. But corporations are increasing their dividends and improving their balance sheets. If it matters to individuals, large-cap corporations are looking great and any pick-up in business will go right to the bottom line.

Canadian National Railway Company (NYSE/CNI), a company with an excellent track record of making money on the stock market, just reported solid earnings that met consensus. The company announced an increase in its quarterly dividend by 15%, representing the 17th time it has done so since 1995.

Of course, the stock market is taking all the earnings news with a grain of salt. No one company is blowing the doors off Wall Street estimates. According to the numbers I’m reading, corporations are once again being highly conservative with their earnings outlooks for the rest of the year. They have to be, because there’s very little in the way of real economic growth available.

Johnson & Johnson (NYSE/JNJ), which is a great benchmark stock, reported fourth-quarter revenues just shy of consensus. The company’s 2013 full-year earnings forecast also came in just below current consensus. Still, Johnson & Johnson’s largest business—medical devices and diagnostics—grew to $7.4 billion, for a solid gain of 13.7%. On the stock market, Johnson & Johnson has been doing well lately. The company’s long-term stock chart is featured below:

Chart courtesy of www.StockCharts.com

Most big brand-name companies are holding their earnings with modest revenue growth. It will be very interesting to see what happens when we get into large-cap technology … Read More

Great News for Large-Cap Tech

By for Profit Confidential

Great News for Large-Cap TechWho has all the money these days? While the government has most of it and can make more of it when it wants, it also owes a lot of money. Rather, large corporations are best off these days, and they aren’t investing much in new plant, equipment, and/or employees. But there is hope out there in the universe of cash-hoarding corporations, and that great hope is in enterprise information technology (IT). Forget retail technology; it’s the enterprise-level IT suppliers that stand to be the big beneficiaries of corporate spending over the next several years.

For a corporation, things are very simple. Company management might ask: should we build a new plant for a new line of windmills? The answer, of course, would be “No,” and they’d then contract it out to China. They ask: should we hire a few more people in the sales department, customer service, or IT support? “Maybe,” they’d answer, “but no full-time employees and let someone else handle payroll.” Management decides they really need to update the company’s e-commerce efforts, asking: should we hire more computer programmers? “No” would be the answer again and they’d contract it out to India. So, who wins in a system like this?

We know the outsourcing corporation wins—it’s winning already. Within this system, though, there are players that are required for it all to work seamlessly and efficiently, the one group poised to benefit from it all: application software, database management, server and storage, cloud and IT “strategy alignment.”

The cash hoard is about to be unleashed, but on enterprise IT, not new plant or equipment, and certainly … Read More

A Bear Market for Stocks? Not for These Two Companies

By for Profit Confidential

A Bear Market for StocksHindsight is always 20/20 when it comes to the stock market, and it’s impossible to be right with your picks all of the time. Recently, in this column we’ve been looking at a number of large-cap companies that I view as being worthy of consideration when they’re down in value on the stock market.

One of the most successful initial public offerings (IPOs) in recent history is MasterCard Incorporated (NYSE/MA). Among large-cap companies, this one only pays a very small dividend, but it’s been a powerhouse wealth creator on the stock market. The stock just hit an all-time record high, and while it did pull back with the broader market during the financial crisis of 2008/2009, it’s been going virtually straight up since being listed in 2006. I remember when both MasterCard and Visa Inc. (NYSE/V) listed on the stock market, and I thought that they would both make for good investments. What a mistake it was not buying shares in these companies. MasterCard’s stock chart is featured below:

MA Mastercard stock market chart

Chart courtesy of www.StockCharts.com

MasterCard is now a $65.0-billion company. The stock doubled over the last year and a half, and it tripled over the last three and a half years. A lot of investors might not think those kind of returns are available from large-cap companies, but obviously, the market proves they’re wrong.

Another powerhouse wealth creator among large-cap companies is Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN), which doubled in value on the stock market over the last year and a half. (Alexion has recovered from every major price retreat it experienced over the last 10 years.) Pharmaceutical and biotechnology … Read More

Why Dividend Increases and Stock Buybacks Will Continue

By for Profit Confidential

Why Dividend Increases and Stock BuybacksA number of large-cap, international companies reported third-quarter earnings that were below expectations. On the stock market, their shares went down accordingly and so did earnings outlooks for the rest of the year. But for a number of these companies, Wall Street analysts are now raising their earnings outlooks for the fourth quarter of 2012 and fiscal 2013.

One company where the increased earnings outlooks have been pronounced is E. I. du Pont de Nemours and Company (NYSE/DD). Ever since its third-quarter earnings report, du Pont’s shares have being going down in value on the stock market. The stock recently bounced off its 52-week low, but earnings estimates have been going up across the board for this year, the first quarter of 2013, and all of next year. The company’s stock market chart is below:

Dupont Company Chart

Chart courtesy of www.StockCharts.com

While business conditions aren’t likely to have changed much over the third quarter of 2012, blue chips have been so cautious with their earnings outlooks that the Street is now betting on “outperformance.” As we all know, corporate earnings are managed, but somehow the systems seem to work. Besides, all investors really care about is growth.

Another large-cap that’s experience a revival in earnings estimates is NIKE, Inc. (NYSE/NKE). With slow economic growth in Europe and China, the company’s earnings weren’t that great in its latest quarter. (See “World Hurting U.S. Revenues, But U.S. Economy Holding up Earnings.”) On the stock market, NIKE has been in consolidation for the last six months. The company’s next earnings report comes out today, and it will be really interesting to see what … Read More

Stock Market: All the Cards Have Been Played

By for Profit Confidential

Stock Market: All the Cards Have Been PlayedOn the day of the Federal Reserve’s announcement regarding targeted low interest rates and a new bond-buying program, the stock market started out strong, only to sell off by the end of the day. This has happened countless times over the last couple of months, and it’s a sign that this market is tired. The stock market is finally seeing through the Federal Reserve, and investors now realize that no further policy action can do anything to help U.S. employment numbers.

This has got to be one of the most accommodative Federal Reserve’s in history. On Wall Street, you couldn’t really ask for a more compliant central banker, and the artificially low interest rates are very helpful for the bond market (by bond market, I mean the system itself, not investors). Corporations are benefiting from the Federal Reserve with lower borrowing costs, but they aren’t investing in new plant and equipment. Large-cap companies are awash in cash, and it’s a lot easier for them to keep hoarding it, or return it to shareholders in the form of dividends or share buybacks. (See “More Dividend Increases Coming Soon—Is This Good or Bad?”) A lot of participants are benefiting from the Federal Reserve’s action, except for the average individual who is looking for work.

One stock market index that just can’t seem to go anywhere these days is the Dow Jones Transportation Index (or average). This index basically hasn’t done anything for the last five years, and if you believe in Dow theory, the stock market will not advance materially without confirmation from transportation stocks. This index is stuck … Read More

S&P 500 Index: Technical Rebound Likely This Week

By for Profit Confidential

S&P 500 Index Technical Rebound Likely This WeekThe S&P 500 index is down almost 100 points, or about six percent, since stock market highs in September and October. The broader stock market has pulled backed meaningfully, but it is not yet in correction territory. I think it’s likely that we’ll get a little upside this week—a small, technical rebound in a market that’s basically without a trend.

The stock market has been producing a recurring trend in share price action since the low set in March 2009. But what stands out from the charts is the declining duration of the price advances and the sobering reminder is that the S&P 500 is still well below its highs set in 2000 and 2007. Real economic growth is a difficult thing for companies to achieve nowadays.

I continue to view the stock market as being in the process of topping out, but I do recognize that there’s good potential for a new upward business cycle to begin in the U.S. economy if global risks can be addressed. The only near-term catalyst that I see lifting the stock market and the S&P 500 before fourth-quarter earnings season begins is if policymakers take action on the sovereign debt crisis in Europe and the upcoming “fiscal cliff” in the U.S.

Many stocks within the S&P 500 have broken down significantly from recent highs. 3M Company (NYSE/MMM) closely mimics the changes in the S&P 500, but this stock recently dropped quite a bit lower after reporting lackluster third-quarter earnings. (See “Many Stocks Are Already Experiencing Their Own Market Correction.”) The company’s stock chart is featured below:

mmm stock market chart

Chart courtesy of www.StockCharts.com

The … Read More

Agriculture Stocks—These Two Are Doing Very Well on the Stock Market

By for Profit Confidential

Agriculture StocksI firmly believe that the commodity price cycle still exists and that agriculture is going to be a key asset for stock market investors over the next decade. We’ve already had a terrible drought this year that affected agricultural commodities, but the global business cycle in terms of supply and demand is still promising for agribusiness and agriculture stocks.

One agriculture stock that’s been a real standout this year is Bunge Limited (NYSE/BG), and I bet it’s a company you’ve never heard of. On the stock market, Bunge has been rocketing higher since April, and one look at the company’s financial results tells the story.

Bunge is in the business of transporting and processing agricultural commodities. The company is based in White Plains, New York, with global operations at the wholesale and retail levels. It has approximately 35,000 employees in more than 40 countries and is a well-known player in global agribusiness.

The company originates oilseeds and grains from the world’s primary growing regions and transports them to customers worldwide. Bunge also crushes oilseeds for the livestock industry; produces bottled oils, mayonnaise, margarines, and other food products for consumers; crushes sugarcane to make sugar and ethanol; mills wheat and corn for food processors, bakeries, brewers, and other commercial customers; and sells fertilizer to farmers in North and South America. (Source: “Company: About Bunge,” Bunge Limited, last accessed November 6, 2012.) You name it; if it’s related to agricultural commodities, Bunge is likely involved in the process.

The company’s stock chart is featured below:

Bunge Ltd Chart

Chart courtesy of www.StockCharts.com

According to Bunge, its 2012 third-quarter revenues grew to $17.3 billion, up from … Read More

World Hurting U.S. Revenues, But U.S. Economy Holding up Earnings

By for Profit Confidential

U.S. EconomyThere are still a lot of earnings reports hitting the wires, and there’s a trend in the numbers. The global economy is dragging down U.S. business conditions, which are actually showing improvement. The stock market is down, but it’s not out yet.

Currently, shares in Apple Inc. (NASDAQ/AAPL) are leading the stock market lower. Shares in Amazon.com, Inc. (NASDAQ/AMZN) and Google Inc. (NASDAQ/GOOG) are down a solid 10% from their highs. Without upward price momentum from these market leaders, the broader stock market is going nowhere.

I still think the stock market is headed lower over the near term, but that it might bottom out around 1,350 on the S&P 500 Index. What third-quarter earnings season has shown is that companies with large overseas operations are hurting relatively stable earnings results from U.S. operations. NIKE, Inc. (NYSE/NKE) represents this trend both operationally and on the stock market. The company’s stock chart is below:

Nike Inc Chart

 Chart courtesy of www.StockCharts.com

From what I’m reading, large-cap companies are reporting stability and even some growth in their U.S. operations. Colgate-Palmolive Company (NYSE/CL) has shown strong resilience in its earnings reports, but like many other multinational companies, operations in Europe are hurting the bottom line. Colgate-Palmolive’s stock chart is below:

Colgate-Palmolive Co Chart

Chart courtesy of www.StockCharts.com

So, while the stock market is right at the point of breaking its 100-day moving average (MA), expectations for fourth-quarter earnings are minute, but not in decline. With stability in the eurozone and China, a recovering U.S. economy has the potential for fourth-quarter earnings to surprise to the upside.

Investor sentiment isn’t that great right now, and third-quarter earnings season will soon … Read More

S&P 500 up Against a Wall Following Slight Breakdown

By for Profit Confidential

Wall Following Slight BreakdownThe S&P 500 is up against a bit of a wall and has to convincingly break 1,465 again, which it achieved in mid-September, in order to accelerate. A lot of corporate earnings have been decent, but quite a few are reporting light visibility for the fourth quarter, and this is no surprise. The stock market peaked mid-September when the mini-rally, driven by a third round of quantitative easing (QE3), consolidated; it has now recovered. We’ve seen large, international companies report earnings or visibility below consensus due to very slow business conditions in the eurozone. Despite the S&P 500’s fair valuation, I think it’s going to be quite difficult for the main stock market averages to accelerate much further.

While Johnson & Johnson’s (NYSE/JNJ) earnings were good and the company’s share price helped the Dow Jones Industrials, earnings results for International Business Machines Corporation (NYSE/IBM) had the opposite effect. This former stock market leader broke down significantly, as you can see in the stock chart for International Business Machines (IBM) below:

 International Business Machines Chart

Chart courtesy of www.StockCharts.com

Expectations were already lowered for third-quarter earnings season. My reading of current corporate results is that blue chip companies are now running out of cost-cutting options to keep their earnings afloat. The likelihood of corporations being able to accelerate their earnings going into 2013 is very low, considering business conditions in the eurozone and declining economic growth in China, which is now the world’s second-largest economy.

The “AGA” stocks, which include Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN), have all retreated from their recent 52-week highs. Amazon.com recently hit $264.00 a share; now … Read More

Want a Stock Hitting a Record High? Bring on the Dish Soap

By for Profit Confidential

Stock Hitting a Record HighThere are still all sorts of blue chips trading right at their 52-week highs; some are trading at their all-time highs. And the best part about this is that these companies are not expensively priced on the stock market.

Colgate-Palmolive Company (NYSE/CL) is one of the blue chips having an outstanding year on the stock market. This stock just hit an all-time record high of $109.84 (split adjusted), up from approximately $75.00 a share two years ago. You wouldn’t think that the dish soap and toothpaste business would be so robust, but it is for this company. Colgate-Palmolive owns and sells a lot of brands; the company even sells pet food. It’s one of those blue chips proving to be excellent long-term wealth creators for income-seeking investors. After a major correction, this company would be very attractive for new investors. The company’s stock chart is below:

Colgate-Palmolive Chart

Chart courtesy of www.StockCharts.com

From my perspective, a stock market investor can do equally well, if not better, picking stocks among dividend-paying blue chips, especially in the age of austerity and slow economic growth. Large-cap companies have the power, money, and diversified assets to withstand the business cycle much better than small companies; if business is slow, all they have to do to keep shareholders happy is increase their dividends and/or share buybacks. (See “The Best Stocks for New Buyers.”) The kind of stock market we have today definitely favors large-caps.

Investment returns from dividend-paying blue chips compound, of course, if the stockholder reinvests dividend payments into new shares. As we know, lots of blue chips offer commission-free dividend-reinvestment plans. With the … Read More

Is the Stock Market Where It Should Be After QE3?

By for Profit Confidential

business arrow diagramOn a lot of occasions, the stock market sells off on the reality of its expectations, but it hasn’t since the Federal Reserve announced a third round of quantitative easing (QE3). The main stock market indices are holding up very well, consolidating more so than selling off on the news. Stock market sentiment continues to be relatively positive, with some hope for the economic future and the expectation that third-quarter earnings season won’t be terrible.

There’s still a lot to be said for the stock market’s reasonable valuation, given the earnings picture. With fairly priced stocks, a lot of which are trading close to their 52-week or all-time highs, there’s always room for a little more expansion in price and less contraction on the downside. A stock market that isn’t expensively priced gives the marketplace a lot more leeway for changes.

Some benchmark stocks that I follow on a continual basis are holding up extremely well, leading me to expect further upside ahead until we get into the heart of third-quarter earnings season. Union Pacific Corporation (NYSE/UNP) is an important component of the Dow Jones Transportation Index, and this stock is trading right at its all-time high, still with a current dividend yield of 1.9%. (See “The Top Stocks Making Money in This Market Right Now.”)

Take a look at Union Pacific’s stock chart:

Union Pacific Corp NYSC + BATS Stock Chart

Chart courtesy of www.StockCharts.com

On the comeback trail is industry benchmark General Electric Company (NYSE/GE), which was hit very hard during the financial crisis in 2008/2009. The stock is about halfway through its recovery to its pre-financial crisis level, lagging most of the stock … Read More

What Doom and Gloom? The Stock Market Is Going Up

By for Profit Confidential

What Doom and Gloom? The Stock Market Is Going UpThe stock market rally continues, and it’s great; that is of course, if you own the right companies. For the most part, the best wealth creation over the last few years has come from large-cap, dividend paying stocks that are the brand names we all know. I’d never thought I’d be singing the praises of mature, blue chip companies (and dividends), but it’s always in the tough times that large-cap companies really shine.

With the expectation of slow or stagnant economic growth in 2013 (and possibly 2014), today’s best performing stocks are likely to keep on leading. I would say, however, that no other large economy on the planet is better able to right itself after a bubble or recession like the U.S. economy. So while the expectation for economic growth isn’t robust, the stock market’s fair valuation combined with dividends can still give low double-digit returns. U.S. corporations are in excellent health, and this is part of the reason why institutional investors are buying right now.

I’ve really been focusing on large-cap companies and their dividends ever since the stock market crash in 2008/2009. When you have such a shock to the entire financial system, you don’t need to find the fastest growing micro-cap stocks—you want to own what institutional investors are buying, and that’s been dividend stocks.

Stock market returns from the 2009 March low have been excellent, and the right shoulder formation on the S&P 500 Index looks like it will soon be complete. As I’ve written before, the long-term chart on the S&P 500 is quite ominous; the peaks make you really wonder how the stock … Read More

Broader Market to Consolidate—No
More Upside Without the Fed

By for Profit Confidential

Broader Market to ConsolidateA lot of smaller companies and micro-cap stocks are now reporting their quarterly earnings, and a lot of the numbers are pretty good. I’ve noticed particular financial strength in a number of micro-cap technology companies, along with good trading action among biotech companies.

There’s no real trend among micro-cap stocks, aside from the Russell 2000 Index, which is about five percent below its recent high set in March of this year. The broader stock market has held up well over the last several quarters, and the Russell has pretty much mimicked the S&P 500.

The best action for stock market investors, as far as I’m concerned, has been in large-cap, dividend paying companies. Micro-cap stocks, like biotech companies, don’t particularly trade as a group; their action is event-driven. Investment risk in the stock market today is very high, and institutional investors have been reticent to invest in micro-cap stocks. The security of dividend income is the reason why so many large-cap companies are trading right at their highs.

The price momentum in this kind of stock market is with large-caps, and it’s going to stay this way going into 2013. There are very few micro-cap stocks in this market that are providing consistent returns; off the bat; I can’t name any. Among micro-cap stocks, industry groups that stand out as the most attractive for risk-capital investors are technology, biotechnology, and mining. All of these subsectors, however, are being met with little investor participation among individuals. Trading action in today’s stock market is only about institutions, and that’s why any micro-cap stocks being considered need to have what institutions are looking … Read More

S&P 500 Index Breaks 1,400—What’s Next?

By for Profit Confidential

S&P 500 Index Breaks 1,400—What’s Next?To be honest, I’m surprised the stock market has been so strong; the S&P 500 Index broke 1,400 so quickly. It’s amazing to me that after a mediocre earnings season, when earnings expectations were revised lower, the stock market has been able to rise. Two reasons stand out for the breakout—a little more certainty regarding the ability of eurozone policymakers to take action to protect the euro, and genuine hope that the Federal Reserve will do more to help the U.S. economy. Trading on hope; that’s what the stock market does nowadays. (See “Equities Market Doing Fine—Just Look at the Long-term Charts.”)

I think the U.S. economy has the makings of a new, upward business cycle, but will likely experience more trouble beforehand. I’m not so much worried about a no-growth environment for the U.S. economy; I’m more troubled by sovereign debt, the U.S. budget deficit, and the U.S. debt ceiling. Going into next year, there is a lot riding on the ability of U.S. policymakers to take decisive action for the long-term good of the U.S. economy and for confidence and certainty in global financial markets. As the eurozone demonstrated, the inability of policymakers to take decisive action resulted in a major breakdown in capital markets.

U.S. corporations are in an excellent position to weather any new storm that comes their way. Balance sheets are strong, they have tons of cash, and most large-cap companies are doing well on the stock market. This is why I think large-cap, dividend paying stocks will continue to lead the stock market right into 2013. Corporate America has never been … Read More

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