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

Posts Tagged ‘large-cap stocks’

The Last Group of Burgeoning Stocks

By for Profit Confidential

The Income Stocks Investors Now CraveQuite a bit of speculative fervor has been zapped out of this market, which is helpful for the longer-run trend.

With the exception of biotechnology stocks, trading action has softened in initial public offerings (IPOs), 3D (three-dimensional) printer stocks, cloud software stocks, and even a lot of restaurant stocks that only recently were very hot.

The stock market is just a continuing cycle of fluctuating investor sentiment. Valuations among junior energy producers got really excessive last year and the entire group now seems to be in consolidation.

Gold and silver stocks appear to have been toast for a while. As is always the case in resource investing, even the best growth stories can’t generally get their share prices moving if the underlying commodity price is stagnant. Precious metals stocks have always traded in manias, and this is not likely to change.

In a slow-growth environment, dividend income is key. And after an exceptional year like 2013, it may just be the only rate of return to be had.

But like so many large-cap stocks last year, some of the best dividend payers have already gone up tremendously. There isn’t a lot of value for an equity buyer these days.

One specific sector that continues to be relatively hot is the master limited partnerships (MLP) of energy companies. There is very good yield to be had from this sector in addition to the potential for capital gains. There have been countless new listings of these securities, and the North American production boom is the reason.

One firm that illustrates the combination of capital gains and income that can be found … Read More

Why the NASDAQ Will Outperform the Other Major Indices in 2014

By for Profit Confidential

Why 2014 Bodes Well for Blue ChipsSo far this year, the NASDAQ Composite Index has outperformed the other large-cap averages, and this is a positive indicator.

At the beginning of last year, blue chips shot out of the gate with uncommon capital gains, and as confidence in the rally grew, investors slowly felt more comfortable with more speculative issues, which are often listed on the NASDAQ.

After a pronounced consolidation during the summer of last year, large-cap NASDAQ stocks, like Microsoft Corporation (MSFT), Juniper Networks, Inc. (JNPR), and even Intel Corporation (INTC), reaccelerated.

I view the price reacceleration in large-cap technology stocks as a combination of attractive valuations and yields and improved expectations for growth. Microsoft’s fourth-quarter sales are expected to grow some 10%.

While blue-chip strength is always helpful, large-cap technology stocks must be a big part of the long-term trend, as they are such a large part of the daily economy now.

The Russell 2000 Index of small-caps is also holding up extremely well and is another positive indicator for the broader market. While stocks are very much in need of a correction, it won’t happen without a major catalyst, and trading action among large-cap technology and small-caps is reason enough to expect more capital gains. The chart of the Russell 2000 Small Cap Index is featured below:

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

Also not to be forgotten is the Dow Jones Transportation Average, which is still just a hair off its all-time record-high. Transportation stocks are always a leading indicator, and if you attribute any worth to the performance of airline stocks, their year-to-date performance is also a positive signal.

Given current information, … Read More

Small-Caps vs. Large-Caps: The Dilemma Solved

By for Profit Confidential

Small-Caps vs. Large-Caps: The Dilemma SolvedIf you had to choose between buying Intel Corporation (NASDAQ/INTC) and Phoenix New Media Limited (NYSE/FENG), which stock would it be? This is the kind of dilemma we are currently witnessing in stock market trading, as investors look at the risk they want to assume.

In 2013, the preference has been for small-cap growth stocks such as Phoenix New Media over the older and established Intel, which provides a nice dividend, if that is what you want.

The example indicates why there has been a move and shift toward the assumption of greater risk—the opportunity to increase the expected return of your portfolio.

The chart below shows the outperformance of Phoenix New Media in the dark green line versus Intel, which is reflected by the red candlesticks.

intel corp

Chart courtesy of www.StockCharts.com

Large-cap stocks like Intel are nice, but for the added return, you need to make sure that you have small-cap stocks in your portfolio. To reduce the risk of small-cap stocks, diversification based on company size and industry is required. (For more on the restaurant segment, read “My Top Picks for Restaurant Stocks.”)

At this point, traders appear to be pursuing the risk of small-cap stocks with the hopes of achieving some big gains. This could happen, yet at the same time, with the good generally comes the bad. Small-cap stocks are vulnerable to higher downside risk—especially when the broader market and economy are turning down.

With the current economy showing some stalling, it may be prudent to take some profits off the ledger for some of your bigger winners. For instance, if a stock is up … Read More

Small-Cap Stocks the Place to Be—If Economic Growth Is Real

By for Profit Confidential

Small-Cap Stocks the Place to Be—If Economic Growth Is RealMake no mistake about it. The wealth in America continues to rise as it is in other parts of the world. Fueling the creation of wealth has been the easy monetary policy, which has essentially pushed up the stock market to its record-highs.

Now the economy is also on the mend; albeit, it has largely been driven by the lure of easy money. Yet growth is growth. At this juncture, the growth, while somewhat muted, is there.

Cyclical stocks are faring well and will continue to do so as long as the economy continues to grow. These companies include the likes of General Electric Company (NYSE/GE), Schlumberger Limited (NYSE/SLB), and Cisco Systems, Inc. (NASDAQ/CSCO).

Yet to make the real big gains and increase the overall return of your portfolio, small-cap stocks are the place to have some of your capital working. The small-cap Russell 2000 index is leading the pack so far in 2013, up a healthy 16.25% as of Wednesday.

The reason is that small companies tend to perform well out of a recession and during economic growth.

The stock market has been seeing some shifting of capital into defensive dividend-paying stocks (read “Investors Down-Shift Risk, Search for Safety Ongoing Theme for 2013”), but small-caps delivered their top gains in the months of January, March, May, and, so far, June.

And my feeling is that as long as the economy grows, small-caps will outperform.

Take a look at the chart of the Russell 2000 index below. The index broke north, as shown by the purple oval, out of the bullish ascending triangle. A bullish “golden cross” is … Read More

Why It’d Be Foolish to Give Up on Small-Caps

By for Profit Confidential

Foolish to Give Up on Small-CapsSmall companies tend to perform well coming off a recession like the one we had in 2008.

The beginning of the year was excellent for small-cap stocks as the Russell 2000 led the way with a 12% advance in the first quarter, including a 6.2% move in January.

We have been seeing some flight to safety in the risk preference of investors.

April has seen some profit-taking emerging in small-caps, as the Russell 2000 is down 2.3% as of Tuesday’s close and is currently trailing the blue chips and the S&P 500. (Read “Investors Down-Shift Risk, Search for Safety Ongoing Theme for 2013.”)

And with the economy continuing to strengthen in housing, manufacturing, and retail sales, small-caps will continue to have good upside potential.

The chart of the Russell 2000 below shows the upward break from the bullish ascending triangle. There’s some stalling and some potential for a relapse to back below 900, based on my technical analysis.

$RUT Russell 2000 small cap index stock chart

Chart courtesy of www.StockCharts.com

As we move forward, a lot of what happens to small-caps will be dependent on the ongoing strength of the economic recovery.

The key to investing in small-cap stocks is diversification and risk management.

Simply the risk is much higher when buying small-cap stocks. For instance, the emergence of bad news could drive small-cap stocks down 40%, while for a large-cap such a The Procter & Gamble Company (NYSE/PG), we would likely only see a decline of a few percentage points.

You should be sure to never load up on a sector and diversify across market caps and risk instead. In this way, you can achieve … Read More

Investors Down-Shift Risk, Search for Safety Ongoing Theme for 2013

By for Profit Confidential

Search for Safety Ongoing Theme for 2013If the first-quarter earnings season turns out to be as bad as the experts expect, then it may be time to look for safety. That means lightening up the load on high-risk stocks and shifting your focus to companies that you know will be around 50 years from now.

The search for safety appears to be the ongoing theme this year, especially within the blue chip stocks that make up the Dow Jones Industrial Average. The index is up 11.2%, ahead of the broader S&P 500, along with the NASDAQ and Russell 2000.

Small-cap stocks, which have been sizzling on the chart, have been underperforming in the recent weeks, as investors shift to the safety of blue chips and large-cap stocks.

The chart below shows the recent superior performance of the Dow Jones versus the NASDAQ, shown by the blue line, and the Russell 2000, the green line.

$INDU Dow Jones Industrial Average stock chart

Chart courtesy of www.StockCharts.com

After the first week of April, blue chips have fared the best, down just 0.09% as of April 5, which is much better than the decline of 2.94% and 1.96%, respectively, in the Russell 2000 and NASDAQ. As the market risk rises—and I feel it is—I expect to see more money flow from higher-risk investments to lower-risk ventures, such as the blue chips.

The move to Dow blue chips is even more popular, given the dividends available on many of these stocks, which is attractive compared to historically low yields available with bonds.

When you are earning less than one percent on short-term bonds, the choice to look at dividend stocks and the equities market is easy.

The … Read More

How to Supercharge Your Portfolio

By for Profit Confidential

Supercharge Your PortfolioSmall-cap stocks will be a key driver of the broader market should the U.S. and global economies continue to improve. In 2012, small-cap stocks trailed only the technology sector as far as performance. The Russell 2000 advanced the most in December. If 2013 is a strong year for the economy, small-cap stocks will deliver.

Small-caps have been impressive so far in 2013, as the Russell 2000 is up six percent, with the index trading at the 900 level for the first time.

In my view, continued economic renewal will drive small companies higher, because these companies tend to be able to react more quickly to a changing economy.

My stock analysis suggests that what happens in January will be an important indicator for the year as far as performance. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to the Stock Trader’s Almanac.

The strong start to 2013 is also a bullish sign, as was the case in 2012 when stocks flew out of the gate. We are seeing a similar situation this year, so expect some gains.

The chart of the Russell 2000 shows the break near 860 on rising relative strength and the moving average convergence/divergence (MACD) indicator. Watch to see if the breakout holds.

Russell 2000 Small Cap index Chart

 Chart courtesy of www.StockCharts.com

I favor small-cap stocks for long-term growth, as the valuations are more attractive and may be worth a look for aggressive long-term investors. (I also like the emerging markets, which you can read more about in “Boost Your Portfolio Returns with the Emerging Markets.”)

And while I view the holding … Read More

Look to Higher Beta Small-Caps to Increase Portfolio Returns

By for Profit Confidential

Increase Portfolio ReturnsSmall-cap stocks performed better than both the S&P 500 and the DOW in what was a cautious November, as the economy showed encouraging growth in several key areas. Early on in December, small-caps are leading with a 0.12% advance versus a 0.64% decline for the S&P 500. The Russell 2000 is above the only key index that’s above its 50-day and 200-day moving averages (MAs), based on my technical analysis.

In 2011, small-cap stocks underperformed. You would have done better investing in a T-Bill versus small-cap stocks, which were negative in 2011 after advancing 25.3% in 2010. Yet the encouraging signs of economic recovery from the 2008 Great Recession in manufacturing, the housing market (read “Why the Housing Market Is Promising but Overextended”), and the jobs market are helping to attract some buying to small-cap stocks, which generally perform better as the economy recovers from a recession.

I continue to favor small-cap stocks for long-term growth as the valuations are more attractive and may be worth a look for aggressive long-term investors.

And while I view the holding of large-cap stocks as an integral part of your portfolio, for added overall portfolio returns, I like small-cap stocks. These stocks add to the risk component of your portfolio, but you are compensated by a higher overall expected return from your investments. You can increase the expected return of a portfolio by simply adding more risk. This is the advantage of adding small-cap stocks.

A standard and simple measure of stock risk versus the market is called a beta—a quantitative measure of systematic or market risk that cannot be diversified … Read More

Looking for Income? Get It Before the Fiscal Cliff

By for Profit Confidential

Get It Before the Fiscal CliffThe fiscal cliff is currently dictating the trading action in the stock market as we near December and the year’s end. The worry is that if the Bush-era tax cuts are allowed to dissipate, the end result would likely be a significant jump in taxes, including those on dividends. The prevailing dividends tax of 15.0% is extremely accommodative to income seekers, but under the fiscal cliff, we could see the tax on dividends for the highest tax bracket surge to 39.6%. For dividend investors, this means a massive jump in taxes in 2013.

Let’s take a look. Say you earn $100.00 in dividends and you are in the top tax bracket. (Want to know the top stocks for the rich? Read “QE3 and the Rich: What Stocks Will Benefit?”) You would pay $15.00 in dividend taxes now, but if you receive the $100.00 dividend on or after January 1, you’d pay a whopping $39.60. The increase would see U.S. dividend taxes approach those paid by Canadians.

With the uncertainty of whether the fiscal cliff will be resolved, we are seeing numerous U.S. companies paying out special dividends to shareholders now to avoid a potential massive tax hit later caused by the fiscal cliff.

From the end of September to mid-November, Bloomberg says that 59 companies belonging to the Russell 3000 Index announced special cash dividends, compared to 15 companies in the same timeframe in 2011. (Source: “Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2102.) The move to initiate special dividends is not a surprise, and I expect the payments to … Read More

Why You Should Stick with the Airplane
Builders and Parts Suppliers

By for Profit Confidential

Why You Should Stick with the AirplaneThe Boeing Company (NYSE/BA) estimates China will require 5,000 aircraft, valued at around $600 billion, over the next 20 years. The company is looking at the new “787 Dreamliner” as its big play on wide-body jet travel despite development issues.

Boeing’s chief rival Embraer S.A. (NYSE/ERJ), the European builder of the “Airbus,” announced on Tuesday morning that it estimates the global demand over the next two decades to be for about 28,000 new planes. There will be over 32,550 planes in the skies by 2031, up from the current 15,500, according to Embraer, and the Asia-Pacific region will account for 35% of all plane purchases. The major airlines will operate in the U.S., China, Intra Western Europe, and India, according to Embraer. China will be the world’s largest domestic plane market in 20 years.

The findings by Embraer are not a surprise and will be driven by higher disposable income in the emerging global markets along with the desire for travel. As I have said in previous commentaries, strong wealth generation in the world’s largest emerging markets, including China and India, will help drive the demand for commercial planes and defense. For investors, I view aerospace as a buying opportunity in the equities market.

Air traffic in China is growing at approximately three times the rate in North America, so the Chinese aviation market is significant. China recognizes this and is developing its own commercial aviation program that will see the manufacturing of airplanes with capacity of over 150 passengers. There are no concerns at this time, as this is still decades away.

In the big plane equities market, … Read More

Dow Jones Transportation Index Signals Trouble Ahead

By for Profit Confidential

Dow Jones Transportation IndexIt is summertime, and you expect the trading action in the stock market to be subdued, but there’s a big divergence taking place, and it isn’t good. The Dow Jones Transportation Index is not confirming the primary trend of the Dow Jones Industrials or the S&P 500 Index. The divergence started in mid-July and follows a stock market with lackluster trading volume and poor breadth.

The Dow Jones Transportation Index reflects current fundamentals, more so than the other stock market averages, which have been going up on the hope for new action from the Federal Reserve. This is why I think the stock market is in the process of topping out. Unless we get a big boost inU.S. economic news or new monetary stimulus from the Fed, I don’t see how the stock market can advance further.

Since the beginning of June, the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index have all done well, albeit on low trading volume. But the divergence with the Dow Jones Transportation Index really bothers me, because many of the large-cap companies that make up the Dow Jones Transportation Index have been excellent stock market leaders for some time now. (See “The Top Stocks Making Money in This Market Right Now.”) If the divergence continues, this will be a bad technical signal.

With the Dow Jones Industrials over 13,000 and the S&P 500 Index at 1,400, I’d have to say that the stock market is fairly but fully valued. Corporate earnings have been exceptionally good, considering all the turmoil in the global economy, and it is difficult to see … Read More

Stock Market Success: It’s About How You Manage Your Risk

By for Profit Confidential

Stock Market SuccessThis is not a time to get too comfortable in the equities market.

Stocks need reasons to move higher. Revenue growth is muted. The economy is moving along but ever so slowly. There is no new stimulus, as both the Federal Reserve and the European Central Bank (ECB) declined to offer any except for bond buying. Spain is in deep trouble, as its 10-year bonds are trading at an unsustainable yield of 7.2%. The reality is that I do not see any reason for stocks to move higher at this point, and this is important.

While blue chips and large-cap stocks are holding up, it’s a different story for small-cap stocks and technology. On the chart, the Russell 2000 is down 2.3% in the first two days of August to below its 50-day and 200-day moving averages (MAs), which are also on the verge of a bearish death cross based on technical picture.

The key now is not to try to time the market, as this is difficult; instead, a good investment strategy is to make sure you have some trading strategies in place.

Having a good investment strategy, including risk management, is the key to successful trading. I have discussed this investment strategy in the past, but every so often, you need to be reminded; otherwise you could become sloppy.

I have been involved in the markets for over 20 years. After learning the investment strategy of each of the world’s best traders, a commonality surfaces: the most important tenet in trading is preserving your investable capital via the use of risk management. The last thing you want to … Read More

Today’s Stock Market Leaders

By for Profit Confidential

Today’s Stock Market LeadersEver since the stock market collapsed in 2008 and bottomed in March of 2009, the best performing stocks, given the risk, have been large-cap stocks, many of which pay dividends. Large-cap stocks have specific advantages during slow economic times: big companies can squeeze their costs to keep earnings afloat, they can tap into large cash resources if required, and they can sell off non-core businesses for capital gains. The advantages for stock market investors are generally less investment risk and the potential for income from dividends. In a bear market, or rather, a recovering stock market, large-cap stocks are just as likely to advance in price compared to smaller capitalized companies.

Institutional investors have been piling into large-cap stocks over the last three years, mostly for the security and the dividends. Even though the S&P 500 Index is still trading at the same level it was back in 1999, the dividends have helped tremendously, especially if that income went into acquiring more shares.

I think large-cap stocks are going to keep outperforming for the next several years, and the dividends they produce are the reason why so many of these stocks are trading now at their 52-week highs. In addition, institutional investors don’t really have anything else in which to invest. Bonds and cash don’t beat the inflation rate, and commodities are unpredictable and don’t generate any income. This earnings season, the takeaway so far is one of stability. Corporate earnings certainly are managed, and that’s why corporate visibility is so conservative for the rest of the year—to make it easier for companies to not disappoint.

As I wrote before, … Read More

What a Bullish January Means for 2012

By for Profit Confidential

January is over and it was quite impressive; not a record by any means, but nonetheless it gives us something to look forward to this year. The key stock indices easily outperformed the historical averages by a wide margin. Technology and small-cap stocks lead the market, with the NASDAQ and Russell 2000 up 7.98% and 6.89%, respectively, in January. The laggards were the blue-chips and large-cap stocks, with the DOW and S&P 500 up 3.56% and 4.41%, respectively. Even Chinese stocks fared well, with the benchmark Shanghai Composite Index up 4.21% in January following losses in 2010 and 2011.

The buying in small-cap stocks suggests continued economy recovery in 2012. So far this year, the housing and manufacturing data are encouraging and point to renewal.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is some speculation the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets and wreak havoc.

A positive January indicates an up year for stocks in 2012 about 78.3% of the time, according to the Stock Trader’s Almanac, albeit this failed to materialize in 2011.

And, while the upward advance is encouraging, you might recall that there was a similar start in 2011 that ended up in a mixed trading year, with tech and small-cap stocks negative.

While investor sentiment continues to be bullish and market breadth positive, the lack of mass market participation is worrisome … Read More

Not Interested in Large-cap Stocks? Why You Should Be

By for Profit Confidential

Large-cap StocksIf you want to see an outstanding performance from a large-cap stock, all you have to do is pull up a long-term chart on McDonald’s Corporation (NYSE/MCD). It’s kind of odd to think that a mature business like burger flipping could be so profitable, but this company has rewarded shareholders tremendously well. This stock market performance should be studied in business schools.

For a large-cap stock and Dow Jones component, McDonald’s has appreciated steadily and with remarkable consistency since 1980. Put a ruler underneath the company’s share price and you’ll see how extraordinary its performance has been. This large-cap stock struggled in 2002/2003, but that’s about it. When the stock market collapsed in 2008 and then hit a low in March of 2009, McDonald’s basically traded flat, just below $60.00 a share. This week, it hit an all-time record high of over $101.00 per share, with a current dividend yield of 2.8%. Not bad at all if you ask me. The stock split seven times since the early 80s and is now due for another split.

A stock market performance like McDonald’s makes me think that bothering with the rest of the stock market is mostly just a waste of time. Financial markets are like a casino where the odds are stacked against you and your win is only the result of someone else’s loss.

I’ve always been a fan of investing in large-cap stocks, especially those that pay dividends. Even though I spend most of my time researching smaller companies, I’ve seen stock market portfolios with a handful of large-cap stocks create a lot of wealth for people. Read More

« Older Entries
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"