Euro problems create U.S. bargains.
Stocks won’t get off the seesaw. For most of the year, rally attempts were thwarted by media-enhanced fears of the U.S. slipping back into recession. Corporate earnings reports for the third quarter went almost unnoticed in the midst of media hysteria about the latest bad news. With over 90% reporting of the companies that make up the S&P 500, overall earnings of America’s biggest companies set a new record. That’s not a record since the financial crisis but a new all-time record.
Earnings are thus providing powerful support for the stock market. Media and political threats of a double dip recession were mere bogeymen but current concerns that Europe will be unable to resolve its Euro problems are real and must be addressed.
Greece and Italy provided the classical roots for Western civilization but the weak contributions of their economies today seem as if they are still based on yogurt and pasta. The Euro Zone agreements smoothed many political differences among its members but the financial crisis beginning in 2008 exposed economic disparities that will probably require major reworking of the structure of the Euro.
This is a complex problem that can be resolved but it will take time and recent indications that Europe may slip back into recession do not help. At the same time, stronger growth rates in Asia and the Americas are putting upward pressure on prices of oil and other commodities. Investors should consider the probable impact of more troubling news from Europe and increasing commodity prices.
Fortunately, the Federal Reserve is continuing its policy of low short-term interest rates, at least into 2013. With corporate profits still strong other than in banking and housing, and stock values depressed by pessimism, the market is offering good values.
Warren Buffett has commented that the best stocks to buy are often the ones already in our portfolios. Mr. Buffett made headlines recently through taking positions in two of our portfolio favorites, IBM (IBM-$186) and Intel (INTC-$24).
IBM is up to $106 billion in sales while growing earnings at a steady 10% rate. It recently raised its earnings forecast and has increased its dividend for 15 straight years. The current yield is 1.5% and it is selling at 12 times 2011 earnings.
Intel is half the size with $51 billion sales but is growing much faster. It yields 3.3% with dividend increases the last seven years. Its most recent quarter showed earnings growth up 25%, yet it is selling at only ten times 2011 earnings. Intel operates in a highly competitive arena and I suspect this modest valuation reflects fears that its chips may suffer profit margin squeezes from cheaper makers. Intel has successfully fought off competition for decades, primarily through developing new chips and recently announced another major innovation in processor speeds.
Both IBM and Intel offer attractive yields, particularly in today’s low interest rate climate. So do our favorite drug stocks, Bristol-Myers (BMY-$31, 4.2% yield), Novartis (NVS-$55, 3.6%) and Merck (MRK-$35, 4.3%). Novartis is Swiss-based and may suffer through association with the Euro group but, like the others, it sells globally ($58 billion sales).
Apple (AAPL-$377) does not pay a dividend although it easily could and will probably begin within a year or two. Its earnings for 2011 will be somewhere around $35 a share, up over 25%. It is thus valued quite reasonably for such strong growth due to concerns as to its continuing strength without its visionary Steve Jobs. His legacy of sector-leading products together with their increasing use in the business community leaves Apple with a continuing bright future.
Global growth outside the Euro Zone will continue to boost oil prices. Exxon Mobil (XOM-$78, 2.4% yield) is selling at only eight times 2011 earnings and Chevron (CVX-$100, 3.1%) at only seven. Gold will continue to be a backstop during turbulent times and Canada-based Barrick Gold (ABX-$50) is the biggest and best managed. It just raised its dividend and yields 1.1%, excellent for a mining stock.
With quarterly earnings season behind us, Wall Street will be looking to retail sales as an indication of the strength of the holiday season. Greece deserves some credit for this annual economic stimulus, as the original Saint Nicholas was a Greek.