Despite a difficult start to the year, countless positions recently turned higher, even among slow-growth names.
E. I. du Pont de Nemours and Company (DD) is a company currently trading around 14 times its forward earnings, offering a 2.6% dividend yield. The stock just broke out of a three-month price consolidation.
This is the way the equity market has been trading since the March 2009 low. No big corrections, just consolidations of various durations. It’s a good reminder of just how powerful monetary policy can be (right or wrong) and that a company’s shares price is a relative valuation or bet on the future.
Du Pont has appreciated approximately 23% over the last 12 months, and this doesn’t include dividends paid. Year-to-date, the return is just less than seven percent.
The company’s sales in the first quarter of 2014 were down slightly compared to the same quarter of 2013 and earnings were cut in half.
The company experienced one percent lower volume, one percent lower selling prices, and a one percent adverse currency impact, comparatively. Yet the stock just keeps ticking higher. This time last year, the position was trading around $55.00 a share; now it’s $70.00.
One research firm recently increased its earnings estimate on the company for all of 2014, but like so many other blue chips, it’s the expectation that sales growth will accelerate in 2015, and this is seemingly the bet by investors.
Du Pont didn’t have a good first quarter, and its top operating division—agriculture—actually produced a six-percent drop in segment sales compared to the first quarter of 2013.
Two key themes seem to be the standouts among buy-side institutional investors: 1) there is a genuine expectation that corporate economic growth will accelerate going into 2015; and 2) they still wish to buy earnings safety.
It’s why existing winners among blue chips should keep doing well so long as there isn’t a shock to the broader market.
Du Pont’s share price performance is similar to other companies, like Johnson & Johnson (JNJ) and even Microsoft Corporation (MSFT). Du Pont has been making divestitures and is due for another dividend increase.
These stocks are well positioned for more capital gains due to their reasonable valuations, earnings expectations, and sales growth, which should accelerate in 2015.
The case can be made that a company like Microsoft is actually a decent buy in this market. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)
The position is not expensive, expectations are going up, and the company should be able to produce 10% top-line growth this year, accelerating to 16% growth, according to the current average consensus.
Eliminate the fact that the main market indices are trading at all-time record highs, and Microsoft is probably trading where it should be.
There’s no rush to be buying this market, but I believe those considering investment-grade stocks in this market should mostly consider existing winners. And this includes a stock like Johnson & Johnson and even a company like du Pont.
This is what institutional investors are doing, and they are the driving force.