You must remember this
After two months of consecutive weekly gains, stocks chalked up a down week. The market was due for a dip although credit was given to the SEC suing Goldman Sachs (GS-$165) for alleged failure to disclose all the risks in a custom portfolio of subprime mortgages. I am reminded of Captain Renault (Claude Rains) in “Casablanca” saying that he is “shocked, shocked to find that gambling is going on” just before he pockets his winnings.
Wall Street typically overreacts to news of litigation. While scars of the subprime crisis are still sufficiently visible to give legs to this story, its impact will lessen “as time goes by.” Meanwhile, Goldman Sachs is trading at 7 times 2010 earnings, the lowest among any of the big financial companies.
Earnings reports for the first quarter of 2010 will dominate financial news over the next month. Expectations are high, possibly too high, and some inevitable disappointments may trigger a 5 to 10 percent pullback in the market.
That happened earlier this year when stocks lost 8% from January 19 to February 8 in the middle of the prior earnings reporting season. After further reflection, the rally resumed and stocks are currently ahead 6% for this year.
Much of the excitement has focused on financial stocks like JPMorgan Chase, which made headlines with improved earnings. Earnings for the bank sector could hardly fail to improve after its disastrous comparative prior performance and most of the gains came from trading as credit card and real estate operations remain plagued with loan losses.
Intel (INTC-$24) produced an even stronger earnings report, accompanying it with a forecast of further increases in sales and earnings. It has almost no debt, yields 2.6% from a regularly increased dividend and is the leader in an essential technological sector. Intel and other well-placed industrial and technological stocks seem better risks than almost any bank stock. It will take more than a quarter before their balance sheets are completely purged of bad loans.
The American consumer is not waiting for improved balance sheets or full employment to resume buying. Retail sales are rebounding and a glance in any Apple retail store shows that the slowdown is over in high-end retailing.
Nordstrom (JWN-$43) is on the upswing. Earnings are headed from $2.50 this year to $3.00 next year. Debt is a bit high but manageable. The current yield is 1.4% but a boost is likely. Coach (COH-$42) is also picking up speed. Polo Ralph Lauren (RL-$60) is also attractive. This high-end group would probably dip more if stocks have a slight swoon and should thus be kept in mind, if that event develops, as the economic recovery is gathering strength and their rebound would be swift.
The recession sharpened consumer shopping skills and lower-end retailers are benefiting. TJX (TJX-$45) continues to expand its TJ Max stores. Big Lots (BIG-$38) is tempting but I prefer the modest but growing dividends from TJX.
Google (GOOG-$55) showed the sensitivity of this market when it sold off despite excellent earnings progress, apparently on concerns that its expenses were up. It is reasonably valued on less than 20 times 2010 earnings although its stock price will be volatile. Apple (AAPL-$245) is similar. Only two months ago, I suggested here a $300 price target in two years and it’s almost halfway there already on strong iPad sales.
As Intel’s earnings pointed out, big tech companies are boosting sales of business equipment and software. IBM (IBM-$130) rang the bell with its earnings report that beat estimates and is trading for only 11 times earnings while yielding almost 2%. “The fundamental things apply . . .”