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

Posts Tagged ‘stock market’

Business Conditions Soft? Not for These Two Companies

By for Profit Confidential

Strong Businesses Stock MarketIf business conditions are good for a public company, then it’s highly likely that its share price has already been doing well in this great monetary expansion.

With the stock market at a high, it’s tricky being a new buyer/speculator. As we’ve seen with biotechnology stocks, the price momentum can quite suddenly come to a halt.

One sector where there is more price momentum to be had is in oil. Not so much in the large, integrated oil companies but in domestic mid-tier producers as well as services. (See “My Top Energy Pick with Market-Defying Momentum.”)

In the large-cap space, Baker Hughes Incorporated (BHI) is now experiencing renewed momentum, both operationally and on the stock market. This oil and gas equipment and services company is seeing solid sales growth in North American operations as well as the Middle East.

In spite of unusually cold weather accounting for a drop in North America’s well count, the company was able to grow domestic first-quarter sales by 6.7% to $2.78 billion. Total sales for the first quarter grew 10% to $5.7 billion, while earnings grew 23% to $328 million.

Baker Hughes has been buying back a lot of its own shares (3.4 million in the first quarter), and the stock recently began a new uptrend. The company’s two-year stock chart is featured below:

Baker Hughes ChartChart courtesy of www.StockCharts.com

Halliburton Co. (HAL) is also experiencing renewed operational and price momentum on the stock market.

The largest oil and gas services company by revenue is Schlumberger Limited (SLB). Its first-quarter sales grew to $11.2 billion, up from $10.6 billion comparatively.

Diluted earnings per … 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

My Top Company for Income and Capital Gains

By for Profit Confidential

Why Every Investor Should Consider a Stock Like This One at This TimeOnce again, Johnson & Johnson (JNJ) has come through for investors. The company just reported a very solid first-quarter earnings report.

Continued strength in the company’s pharmaceutical business is the big reason for the growth. Total global sales grew 3.5% to $18.1 billion, with domestic sales growing 2.2% and international sales growing 4.5%.

Notable in the company’s latest numbers was strength in European sales, which is an emerging trend this earnings season. Johnson & Johnson reported a nine-percent gain in sales to Europe, growing to $4.89 billion during the quarter.

Excluding some one-time items, first-quarter earnings were $4.4 billion, or $1.54 per diluted share, for an increase of 7.8% and 6.9%, respectively, over the same quarter of 2013.

The company boosted its full-year 2014 earnings guidance to between $5.80 and $5.90 per share, up from the previous $5.75 to $5.85 per-share range excluding special items.

After the stock market sell-off in January, Johnson & Johnson’s share price dropped to around $87.00 a share by early February. It has since made a full recovery, now trading close to $100.00.

I still view this company as a position worth considering for a long-term portfolio when it’s down. Typically, the stock isn’t down for long. Its five-year stock chart is featured below:

Johnson & Johnson ChartChart courtesy of www.StockCharts.com

According to its numbers, Johnson & Johnson’s consumer products business is pretty flat, while medical device growth can be volatile. The anchor to the company’s business and its profitability remains pharmaceuticals, but the other business lines are complementary. Instead of just a pure-play large-cap pharma business, the diversification among other product lines helps with cash flow.

Johnson … 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

Why the Chances of a Total Collapse in Stock Prices Are Increasing

By for Profit Confidential

Why You Shouldn't Be Buying Stocks NowMark Twain once said, “Whenever you find yourself on the side of the majority, it’s time to pause and reflect.” For stock market investors, the time to pause and reflect is now.

Everywhere you look (except in these pages), you’ll find individual investors and institutions bullish on key stock indices. It’s like they believe they can only continue going in one direction—up. Not much attention is being paid to the fundamentals that suggest a market sell-off is nearing.

In January and February, investors bought $43.29 billion worth of long-term stock mutual funds. While March’s money flows into mutual funds are not available, looking at the weekly data, it suggests investors continued to buy the key stock indices. (Source: Investment Company Institute, last accessed April 2014.)

Please look at the chart below of the National Association of Active Investment Managers (NAAIM) Exposure Index. This index looks at how exposed managers are to the key stock indices.

NAAIM Exposure Index ChartChart courtesy of www.StockCharts.com

This chart says fund managers are heavily exposed to key stock indices, with 90% of their portfolios invested in stocks. The exposure to the key stock indices has been high since the beginning of 2014, but at the same time, stock prices have been coming down.

Sadly, this isn’t all. Pension funds, the so-called conservative investors, have increased their exposure to key stock indices as well. Take the New York State Teachers’ Retirement System, for example. It is one of the biggest in the U.S. In 2013, the net assets of the fund increased to $95.4 billion. Its exposure to the equity market was $39.87 billion—roughly 41% of all assets … Read More

My Top Energy Pick with Market-Defying Momentum

By for Profit Confidential

My Top Energy Stock Pick for This Slow-Growth MarketThe strength in this market is with oil, as both the spot price and oil stocks are holding up very well.

While the broader market has been experiencing a well-deserved price retrenchment, both large- and small-cap oil stocks have been on the comeback trail. The price strength is helpful as speculative fervor continues to come out of equities. The performance illustrates how helpful sectoral portfolio diversification can be when asset prices fall.

ConocoPhillips (COP) is not expensively priced at approximately 9.5 times trailing earnings. The stock sold off significantly at the beginning of the year but has since recovered nicely. Currently yielding just less than four percent, this oil and gas story is similar to the other big integrated energy companies: it isn’t about production growth but more about income for investors.

One company we’ve looked at several times in these pages is Kodiak Oil & Gas Corp. (KOG). This is a Bakken oil play that’s really doing well. This stock was consistently expensive, being a highly liquid favorite of institutional investors, but earnings have caught up to the share price and the story is still intact. This junior energy producer still has a very bright future. The company’s stock chart is featured below:

 Kodiak Oil And Gas Corp ChartChart courtesy of www.StockCharts.com

Energy consistently has a role to play in equity market portfolios, and it doesn’t have to be pure-play production stories. In terms of resource investing, I find it much more attractive over precious metals, particularly for investors looking for some longevity in their holdings.

In an environment that’s likely to remain slow-growing for several years, I like both the income and capital … Read More

Two Big Trends to Emerge This Earnings Season?

By for Profit Confidential

The Two Big Themes This Earnings SeasonLots of companies have broken out of their previous long-term trends on the stock market, and it’s a positive, contributing signal to a secular bull market.

One company that recently beat Wall Street consensus and just broke out of its previous price trend is A. Schulman, Inc. (SHLM) out of Akron, Ohio.

This business deals with resins and plastic compounds. It’s not very exciting, but the company is growing, it pays a dividend, and its corporate guidance is rising.

A. Schulman is one of the few companies that actually file their SEC Form 10-Q commensurate with their earnings press releases. It’s something that’s very much appreciated because this information is typically more in-depth than a plain earnings report. Even if you aren’t interested in the resins and plastics business, what a company like A. Schulman says about its business conditions is helpful in shaping your own market view.

The company just reported solid growth in its second fiscal quarter of 2014 (ended February 28, 2014). Management said that business in Europe is getting better, with noticeable sales gains in the automotive and electronics markets.

Most of the company’s sales come from Europe, the Middle East, and African regions, which is often described by the acronym EMEA. Sales to these countries gained 12% in the most recent quarter to $383 million.

Sales in the Americas grew nine percent to $157 million, but they would have been stronger if not for foreign currency impacts, particularly in Argentina. Management is also de-emphasizing commodity-related sales, which are less profitable. Asia Pacific (APAC) sales grew 67% to $48.4 million, mostly due to an acquisition.

Last … Read More

My Simple, Safe Investment Strategy for Playing Risky Stocks

By for Profit Confidential

Here's a Strategy to Play Momentum Stocks While Limiting RiskThere’s some hand-holding required out there in the stock market. We have seen destruction in the momentum biotech and Internet stocks that have corrected by more than 30%.

Now we are hearing some analysts on Wall Street saying to jump back in—but I’m hesitant at this juncture, as the downward risk is likely not over yet.

The reality is that, given the superlative gains recorded in 2013 by many of these biotech and technology momentum stocks, you shouldn’t be surprised to see the current malaise.

The fact that many of these highflying stocks in the stock market have more than doubled in a year should be a red flag. My simplest advice is to wait for the selling to subside in the stock market before you jump into these stocks.

You also need to be careful when hearing the bullish comments by Wall Street firms on these momentum stocks. Many of these firms have investment banking relationships with these stocks; it’s only natural to support your clients in the bad times.

Don’t get fooled by the stock market rhetoric. Instead, take a prudent approach to the stock market.

You don’t want to be caught exposed on this stock market unless you are fine with losing money should the selling intensify. Like I wrote at the beginning of the year, making money on the stock market will not be easy this year and capital preservation should be your objective.

Now, if you are willing to risk some capital and feel a stock market bottom is near, then what I suggest you do is consider using call options as a risk … Read More

Movie Tickets and New Homes: Why They Are Both in Trouble

By for Profit Confidential

The Untold Story of the Pinned-Down U.S. ConsumerIn 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.

And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.

The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)

And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.

Houses Sold - New One Family ChartChart courtesy of www.StockCharts.com

You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.

Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.

Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More

Stock Market Setting Up for Extended Break?

By for Profit Confidential

Soft Q1 Suggesting Market Set for Extended BreakThe S&P 500 index really hasn’t done much since the beginning of the year but churn…but then again, why shouldn’t it?

For stocks, 2013 was an exceptional year. If we get another positive year on top of dividends, then it’s total gravy.

The capital gains over the last several years have been highly unusual, representative of the gains often seen after a major financial crisis.

There are no bandwagons to jump on in this stock market. Investor sentiment finally had a bit of an awakening over the last several weeks. Big investors booked some profits after the big price recovery in February, which occurred because of verbal reassurances by the new Fed chair, Janet Yellen. If there wasn’t further hand-holding from the Fed, stocks likely would have continued January’s sell-off into a full-blown correction, helped by events in Ukraine.

I’m of the mind that the stock market may take an extended break over the next two quarters, as it’s so often done in the past—probably more of a price consolidation over a correction; top-line growth is still pretty modest.

I’m still a big fan of dividend income and also a higher weighting given to cash within a portfolio context. Very little stands out in this stock market as an exceptional buy. There are some exciting innovations in the marketplace, but valuations for many of these stocks are still way off the charts.

Precious metals continue to prove themselves as an unreliable asset class. Spot prices are stuck and all-sustaining mining costs per ounce are still going up. It’s a tough road ahead for precious metals stocks.

But this is … 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

Markets Asking a Lot from Blue Chips; Can They Deliver?

By for Profit Confidential

Wall Street Earnings are beginning to roll in and quite a few companies are missing Wall Street consensus.

This doesn’t mean, however, that there isn’t growth out there; only that estimates have so far been a little optimistic.

CarMax, Inc. (KMX) is a well-known used-car dealer. The company’s latest numbers were decent, but they came in below what Wall Street was looking for.

Fiscal fourth-quarter sales grew nine percent to $3.08 billion, which is pretty good. Comparable store unit sales grew seven percent in the fourth quarter and 12% year-over-year.

The company had to correct some accounting procedures related to extended service plans and warranties, and it took a hit on earnings because of this.

CarMax is buying back its own stock and just authorized another $1.0-billion repurchase plan that expires at the end of the 2015 calendar year. The stock only dropped marginally on the news.

Another company that missed consensus but is very much a growing enterprise is AZZ Incorporated (AZZ) out of Fort Worth, Texas. We looked at this company last year. (See “Things Are Looking Up! Let’s Hope They Don’t Wreck It.”)

This is a good business. The company manufactures electrical equipment and components for power generation and transmission. Management recently said that business conditions are improving and new quoting activity is noticeably stronger.

Fiscal 2014 fourth-quarter revenues came in at $180 million, compared to $140 million in the fourth quarter of 2013. Earnings were $10.2 million, or $0.40 per diluted share, compared to earnings of $13.2 million, or $0.52 per diluted share.

While the company actually missed Wall Street consensus earnings by $0.02 a share … Read More

The Truth Behind Friday’s Jobs Market Report

By for Profit Confidential

More Jobs Created but Underemployment Rate Goes UpBoy…did investors ever get excited about Friday’s jobs market report. In case you haven’t heard, in March, 192,000 jobs were added to the U.S. economy.

The chart below shows stock market investor reaction after March’s jobs market report was released Friday morning; and investors bought more stocks!

Sure, the March jobs market report showed some improvement. But investors overreacted, as usual. In fact, for me, it’s just more of the same old thing: investors are taking any type of good news as an excuse to push stock prices higher, which is a classic sign of a market top.

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

Deep in March’s jobs market report, we just see more of the same structural problems that have been plaguing the U.S. economy for years now.

In specific…

  • 15% of all the jobs created in March were in the low-paying food services and drinking sector. That’s 30,000 jobs.
  • The number of part-time workers in the economy continues to rise at an alarming rate. In March, there were 225,000 more part-time workers than in February—there are a total of 7.4 million part-time workers in the U.S. economy!
  • The long-term unemployed in the U.S. jobs market continues to rise. In March, they accounted for 35.8% of all unemployed. Right now, the average duration of unemployment for an American worker is 35.6 weeks. At the end of 2007, it was 17 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 4, 2014.)

Finally, the underemployment rate—which includes people who have given up looking for work and people who have part-time jobs, but who want full-time work—remains very high. … Read More

Why These Four Rail Picks Are on My Radar

By for Profit Confidential

The One Stock Market Sector That You Need to Have on Your RadarThere’s a boom going on, and it’s old economy. The railroad business is alive and well. And equally as impressive as the freight and earnings results, railroad services and related businesses are benefitting.

Over the near-term, it’s likely there’s going to be further legislation regarding the safety of oil railcars, meaning the retrofit market will be substantial. I think investors should have the entire sector on their radar. Many of these stocks have already done well.

One company we looked at last year in these pages is The Greenbrier Companies, Inc. (GBX), which has plans this year to double its manufacturing capacity of tank cars, which are in high demand. (See “How to Play the Bakken Oil Boom While Oil & Gas Companies Are at Their Highs.”)

The company’s latest earnings results actually missed consensus, as the business wasn’t quite able to keep up with the hype. But this doesn’t mean that the future isn’t bright for this industry. Greenbrier’s one-year stock chart is featured below:

Greenbrier Cos ChartChart courtesy of www.StockCharts.com

One company that only recently experienced new interest from equity market investors is American Railcar Industries, Inc. (ARII). This firm, out of St. Charles, Missouri, sells hopper and tank railcars.

It’s a mature company, but earnings estimates are going up for 2015. The stock is not expensively priced, and its recent breakout from its previous consolidation is very interesting.

Another company that’s waiting for its stock market breakout to occur is FreightCar America, Inc. (RAIL), which has been trading in a range for the last five-and-a-half years.

This year, Wall Street analysts expect a big resurgence in top-line … Read More

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