April has been a rough month for investors, sending U.S. shares down almost 10 percent.
- May 06, 2005
- admin
- Investing
IT WOULD CAUSE INVESTORS IN ENGLAND, JAPAN AND GERMANY TO RUN INTO
THE STREETS IN CELEBRATION.
In France, officers of investment bank Lazard Freres would stop
cursing Bruce Wasserstein, pull out the expensive brandy and toast
to his health.
No, I’m not talking about a Euro-zone proposal to make Jerry Lewis
Day a national holiday.
Nor am I talking about giving citizens of each country a free ticket
to the next David Hasselhoff concert.
What I am talking about is something that could only cause gloom
and doom in the greatest nation on earth:
I’m talking about 3.1% first quarter GDP growth.
That’s right – our economy expanded at a rate of 3.1 % in the
firstquarter and the stock market hit the skids with a thud.
It’s bizarre if you think about it really.
In any other “developed” country, news of 3.1% growth would be
cause for celebration.
Here, it sends investors running faster than Democrats were chased
out of the Red States.
Are we in such a severe bear market that news of 3.1% growth is
seen as bad?
The answer is yes.
But you know what? It’s not a bad thing.
Why?
Because although the market has been rough, U.S. companies have
announced excellent earnings growth.
The result?
Stock prices have declined – even for strong companies like
Timberland (SYM: TBL) and K-Swiss (SYM: KSWS) even while
earnings have risen sharply.
And that means that we’re beginning to see stocks selling for
more attractive prices.
Let’s look at the facts:
Eight weeks ago everybody from Larry Kudlow to Jim Cramer
were bullishley proclaiming the comeback of the “Goldilocks”
economy.
Of course readers of this column knew that we were bearish, but
it didn’t matter – the “smart” money was bullish.
And what did the market do?
It dropped 1,000 points.
But now the exact reverse has occurred.
Turn to any channel and the same rocket scientists who were so
bullish eight weeks ago are suddenly sounding bearish.
In addition, some major Wall Street brokerage firms such
as JP Morgan (SYM: JPM) are beginning to tell their clients
to reduce their stock exposure.
Now I’m not telling you that happy days are here again – far
from it.
What I am saying is that corporate earnings are not as bad as many
“pros” would lead you to believe.
As a matter of fact, over 65% of companies in the S & P 500
reported first quarter earnings that beat Wall Street estimates.
This is above the long-term average of approximnately 62%.
What’s more is that only 17% missed estimates versus the long-term
average of 20%.
In short, more companies than usual are beating estimates.
So, what does all this mean?
It means that first quarter earnings are showing:
1. A larger number of companies than normal are beating estimates.
2. The companies that are beating estimates are beating by more than
typically occurs.
3. The aggregate earnings gain have surpassed expectations by a larger
than normal amount.
More importantly though is the fact that while corporate earnings
have shot higher, the stock market has gone lower.
This divergence has created some interesting buying opportunities
for investors.
For example, General Electric (SYM: GE) announced earnings growth
of 21%, but it’s selling for a P/E of 21 versus a P/E of 23
last November.
Wal-Mart’s (SYM: WMT) P/E was a rich 25 in November of last year,
but has recently dopped to 19, while earnings have grown an
impressive 19 %.
And Procter Gamble (SYM: PG) – acquirer of Fallen Angel Stocks
recommendation Gillette (SYM: G) – has grown earnings by 11%
while it’s P/E has shrunk from 23 to 20.
By no means are we recommending that you dive headfirst back
into the market.
What I am suggesting is that there are several moves you could
make that can protect your assets AND put you in a position
to make some money.
Here they are:
1. Take Profits on Small and Mid Cap Stocks: Stocks in this group
are always first to move when the economy expands. Hence, the
dramatic rise in small and mid-cap shares during the past 2 years.
Conversely, they are the first to take it on the chin when the
economy slows. Take profits while you still have them – that’s
why we sold K-Swiss after it ran from $17.5 to $31.
2. Only Buy Businesses With Pricing Power: The world is divided
into two types of companies – those that have pricing power and
those that don’t. Only 2% of companies have it – the ability
to raise prices year after year above the inflation rate.
Fallen Angel Stocks recommends both Gillette and Comcast,
both of which have pricing power and both of which are higher
than our recommended price.
3. Eliminate Companies with Debt: I cannot stress the importance
of this enough. A company with over 40% of its capital in debt
is a prime candidate for trouble in a weak economy or during
rising interest rates. That means I would avoid both
General Motors (SYM: GM) and Ford (SYM: F).
4. Convert Into a Fixed Mortgage: For any folks out there who
have adjustable rate mortgages this is likely your last chance
to lock in historically low interest rates. Visit either
www.lendingtree.com or to www.eloan.com to move quickly on this.
— Dylan Jovine