Updating Old Coverage and Introducing a New Favorite Group of Stocks

With family having left, I wanted to update the topic of recent posts. 

AAPL:  I penned a bullish note pre-earnings.  Sales and earnings disappointed, but leaks of upcoming product intros have spurred a massive rally.  This has occurred on significant declines in current quarter and next fiscal year estimates from the analysts.  AAPL fans are not deterred.  40% yoy increase in earnings estimates are expected from a number of members of an AAPL-oriented forum in which I participate, whereas analysts are looking for perhaps half that yoy gain.  For the first time since I started blogging enthusiastically about AAPL in spring 2010 around $250/share,  except for the period of uncertainty regarding SJ's illness/impending demise, I think that AAPL is a good but not great stock going forward-- though it is a great company.  I'd like to see more fear and improving fundamentals to think it's a great stock prospectively, which are situations I see with several other companies that unlike AAPL are well off prior highs though along with Apple they have record sales and earnings.

I have handled the commodities situation well so far, as well.  I stood back from PPLT and PALL a couple of months ago when they just didn't act right.  However, platinum was already at the marginal cost of production for a number of mines.  Probably, similar for palladium, which is a thinner market.

As soon as I read about the tragedy at the Lonmin mine in South Africa, with dozens of people shot dead by police for protesting, I bought the early surge up in PPLT from lower levels than where it had been when last I blogged on it.  I also bought PALL, which trades with PPLT.  These stocks (commodities) are "acting well".  I speculate that even in a "sluggish" global economy, these industrial (and ornamental) metals are going to rise over time.  In the short run, Johnson Matthey put out a report around March of this year suggesting that platinum would like sell around $1600 this fall, and palladium would be around $715 (per ounce prices).  They know the market super-well and have had a good track record on price projections so far as I have seen.  These are thus both "value" metals and I think they can be bought here despite the recent price surge.

Of my current favorite stocks, one is old, two are new.  Old is Con Ed (ED), which after hitting an all-time high took a tumble correlated with the sell-off in T-bonds and the NAZ surge.  Relative strength collapsed to 14 from a period of time at above 80.  Yet the fundos are fine operationally, earnings are rising.  Unbelievably for this boring company, Value Line's computer gives it above average price potential (rank 2) and a technical ranking also of 2.  I have been getting Value Line for decades.  If Con Ed has ever been a #2 for timeliness of stock price movement, I can't remember it.

Remember, ED is a bond substitute in my book.  I continue to foresee it trading to a 3% dividend yield, even in a scenario in which the 10-year T-bond rate rises to 2.5%.  I have no idea when this might occur.  (I thus see little need for most investors to hold bonds.) 

New entrants, and my current momentum favorites, are AGU and CF.  These fertilizer companies have P/E's below 10, strong financial strength, and rising earnings estimates.  CF has the best stock chart around.  AGU looks strong, as well.  AGU has the advantage here of having a catalyst.  Jana, a hedge fund, is an activist shareholder with a 5% stake.  They want AGU broken up, as it has a large global farm retail division.  I like ag over consumer electronics here.  One has shortages, the other is moving to saturation in parts of the world that don't require low prices to buy the product.

Getting back to electronics, the other strategic (not necessarily tactical) fave I have are the telecoms that are "doing well".  These include T, VZ and BCE.  These can be yield stocks when the market again starts to worry about growth, but they participate in the growth of data usage, etc. etc. from the spreading use of mobile devices.  All are rising out of bases on the stock charts, offer over 4% dividends which are expected to rise, and (importantly) have gently accelerating earnings growth already reported.  These stocks could all trade much higher simply as bond substitutes, as well.

The stock market, in fits and starts, overvalued by numerous metrics as it is, has thus begun to make the (usually slow) turn to being less overvalued than bonds.  This turn is just beginning, but it is clearly established for the stronger blue chips. 

Newton's Fruit Still Falling Upwards, and Other Observations

With markets at a strange "new normal" of zero-ish interest rates for heavily indebted but "safe" sovereigns, and where an historically normal long-term interest rate of 6-7% for Italian debt is, we are told, unsustainable, a relative sanity prevails in a few sectors of other markets.  To wit, large-cap technology stocks are, despite operating in growth fields, relatively cheap.  Amongst them, none is as large or as cheap as Newton's fruit, aka AAPL.  As much of the investing public knows, Apple discloses how last quarter went for it on Tuesday afternoon.  It will offer a hint of the current quarter.

Apple is growing at an enormous rate.  Last quarter, its operating margin soared to 47%.  It has made no $6 B acquisition as MSFT just has written off.  There will be no writeoffs.  More importantly to me, there will be no non-GAAP earnings presentation.  There will be no acquisition of "cheap" debt. 

For those occasional investors who do not follow all things Apple as I do, the company has been on an unrecognized roll in key but under-reported areas.  It has been securing potentially important legal victories over Samsung in the court battle in California heard by the Korean-descended Judge Lucy Koh.  Florina Mueller, an expert blogger on these matters, said this past week: 

I've said it before that whatever happens at the upcoming trial, Samsung won't be forced out of the market, but a very significant breakthrough for Apple's intellectual property enforcement is increasingly likely.

Mr. Mueller is a cautious blogger.  It means something when he words this so strongly.

Competitively, Microsoft appears confused with its transition to Windows 8.  Unlike Apple, which is adjusting its Mac OS toward that of iOS but keeping it different, MSFT is going all in on the tablet-phone OS for Windows.  This is tres strange, given that MSFT has almost no market share in mobile devices.  Worse, MSFT's partner in telephony, NOK, had its debt rating lowered into deeper junk territory last week.  Also horrible for the Microsoft ecosystem is its "Surface" tablet product.  Mr. Softee is now entering into direct hardware competition with the hardware licensees that have been so

I suspect that as Retina Display-enabled Macs roll out and few Windows customers "upgrade" to Win 8, the Mac's market share in "PCs" will increase.  At some point, there could be a tipping point in which the Mac platform regains the lead over Windows in desktop and larger-than-iPad mobile computers.

Last but not least, the iPad is the product of the decade.  (The iPhone was the product of the prior decade.)  The iPad is estimated to have 90% share of its category, namely 10 inch tablets.  It is up to Apple whether it wants to make Google's new small tablet, Amazon's Kindle line, etc. wildly unprofitable by launching a mini-iPad.  Small matter.  The iPad is Apple's main entry into the business market.  The iPhone is a worthy partner.  Tim Cook, as an ex-IBMer and an MBA, is much more oriented to succeeding in the business world than was Steve Jobs.

A few months ago, Apple's head product designer, Jonathan Ive, disclosed that the current project he is working on feels like Apple's most important project yet.  One doubts this is simply the next iPhone iteration.  Assuming it is the long-awaited full-size television, and that it launches next year, Apple will have in 2013 a rapidly-growing iPad product or product line, an important and still-growing iPhone product, a potential third blockbuster television product, and a Mac line that continues to gain market share and could surprise to the upside.  Plus, iTunes is a large business that sooner rather than later would be a Fortune 500 company all on its own; and iPods remain a cash cow that both require no advertising expense and are so small that they take up little display room in Apple stores.

Apple is the financially strongest corporation in the world.  It has the fastest growth of any large company.  Its retail presence is so strong that if it wished, it could increase its marketing of other companies' products, thus filling any temporary gaps in its own product lines.  It is becoming more like an integrated oil company in that it is expanding its manufacturing operations backwards along with the growing direct retail presence.  Its dividend yield exceeds that of the 10-year T-note.  Value Line anticipates that it will have at least $200 B book value, with no intangibles or goodwill on the books, by the end of CY 2013.  It could easily earn $50/share this calendar year and could easily earn $100/share by CY 2015.  Why is its P/E below market when it has the best financial statement and the fastest growth of any large company in the world?

I think the answer is that the business and analytic community has never seen any very large company grow so fast organically.  There is fear that somewhere, somehow, Apple will go the way of RIMM and NOK; so, the analysts "won't get fooled again".  LOL.

Regardless of how trading goes before and after earnings, AAPL is IMHO the best growth stock around.  It is growing at an unbelievable rate.  It sells at roughly 10X expected CY 2012 earnings net of expected cash and marketable securities on hand by end-2012, even after "haircutting" the value of offshore assets.  Yet its two major product lines are early in their life cycles, and a major new product line may well be introduced next year. 

So far as I can see, most stocks are overpriced given the serious economic and financial dislocations that exist today globally and in the U.S. and other leading economic powers.  AAPL is an exception, though it is not a "Graham and Dodd" value stock.  (LOL again)

The only other stocks I find worth owning include the occasional DE-type of reasonably-priced cyclical stock and a few other high-quality equities, but I think they get cheaper before they get more expensive.  Then, for now, there is the derivative bond play, as it were, in the Con Ed-type stock.  Steady ED is simply too cheap if one believes that its dividend is secure.  You can own a 30-year T-bond at about 2.5% per year or ED at about a 50% higher yield with some inflation protection and- believe it or not- takeover possibilities.  With the 10-year yield at (say) 1.5%, ED should be about double its current share price to re-establish its historical relationship to that benchmark bond.  Thus ED is already discounting a major rise in interest rates. 

Spain is now widely recognized as bust.  I suspect that once Italy is so recognized, that will be the end of the bad news and it will be time to buy inflation hedges again.  John Mauldin is promoting France as next up.  I don't think that's in the cards, at least not this economic cycle, though of course we shall see what we shall see.  Thus my game plan for now strategizes 2012's coming hurricane season months as reprising some combination of 2008 (Europe's sovereigns taking the place of US financials this time around) and 2011, as economies lurch down again as they did last year in the pre-recessionary phase.

Meanwhile, the valuation and growth trends favor AAPL gaining a higher relative P/E to the market while earnings grow rapidly.  AAPL and ED, a strange combo to make up my investment faves.

Turnaround Monday- Didn't Wait for Tuesday

As was strongly suggested on yesterday's post, today the European and U.S. stock markets staged what looks to be a major intra-day reversal, both in Europe and here.  Spanish and Italian govvies were clobbered.  The SPY closed below its 150 day sma once again, and has a 10 week pattern now of lower highs since the April 2 high.  Lower lows coming soon to a stock market near you would be highly unsurprising.

I am long a variety of utilities because of my favorite reason to buy/own stocks:  income in a world starved for seemingly secure income; and technicals.  These include ED, AVA, SWX, WGL, XLU.  Note these have replaced my zero-coupon Treasuries, on which I took profits the week before last, and now I am increasingly ramping into the utilities as a preferred income and price appreciation play.  Today's drop in interest rates is perfect for this thesis.  My expectation is that utilities will suffer profit-taking on days like today but then go up a nice amount when we have days as we did last week when stocks rebound and rates go up.  I'm banking on some resumption of the historical relationship between the 10 year T-note and utility yields.  Some utes could go up 50%++ if that occurred near today's record-low T-yields.  (Not counting on that!)

I also own a few of the small community S&Ls/bank stocks I have mentioned for quite some time on The Daily Capitalist.  I prefer not to name them b/c they are so illiquid.  Finally, I own a very modest amount of stocks with varying charts that are "normal" operating companies, are ultra-high quality, have the leading position in essential growth industries, and have TTM P/Es of 7-14.  In general, they all are GARP stocks that are well off their highs but with record earnings, and all pay dividends and have substantial tangible book value.

I am also long a significant amount of some of the leveraged closed end tax-exempt bond funds, the largest holdings being NIO and NVG.

I see investors turning away from the SPY until it yields double the 10-year Treasury.  This process takes time.  That's how it ended up in Japan, with a 1% 10-year JGB and a 2% Nikkei yield.  In the US in the 1940s, the market had periods where the highest-quality stocks yielded 7-9% with T-bond yields marginally higher than today's.

Once people really start worrying about stocks, a 2% SPY yield is trivial.  They can go out for lunch and come back to find the SPY down that much, just like that.  Thus we saw the psychology to get high dividends- and note back in the '40s, stocks often traded close to tangible book value, which as the decade drew to an end got to be understated due to inflation.  I expect the lust for high dividend income is likely to return.  For now, utilities with seemingly secure dividends are the best way I see to make investment lemonade out of today's ZIRP-era lemons.

I also took very small trading profits on GTU, having bought it late last week at a zero premium to NAV, selling it today with bullion a little below where it was when I purchased GTU but the premium to NAV had rised to 3+%.  Every little bit helps.  GTU does not fit the income theme!  With oil turning to the downside today, I don't want more than a core gold holding, the trend being your friend and all that.

Gold Up but Oil Down: A Mixed Message

Oil and gold are doing what they did in later periods of 2008 as well as last year.  Oil is breaking down while gold is moving up.  The gold:oil ratio is either about 20:1 (WTI) or about 17:1 (Brent).  Either way, gold is not historically cheap to oil.  There is clearly more room for oil prices to drop, both fundamentally and based on my reading of net short positioning  of the commercials in the crude oil futures market.  Thus as in 2008, a deeper low in the gold market is very possible (no guarantee), as people start really fearing deflation (perhaps).  More fundamentally, in recessions, people must pay their bills with currency, not gold, plus jewelry purchases decrease.  Finally, let's remember that the gold is now about 4X as expensive relative to U.S. residential real estate as it was when the ratio was at its minimum about seven years ago.  You can't eat either gold or a home, but you can live in the latter (or rent it out for a profit, or so you hope).  Value buyers are looking to homes this cycle for inflation protection, not only gold.  I think the financial markets will reflect this relatively high price of gold compared not only to houses but to metals such as platinum.

Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV.  But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.

All recessions are deflationary (or disinflationary).  As regular readers know, I give ECRI's views more weight than the Street does.  Their WLI was down again today, and the multi-year trend is uninspiring.

If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing.  For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs.  LOL!  Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession?  Platinum "could" fall a lot further from here.  Just look at the 2008 lows if you are skeptical.  Maybe it can't go so low, but sub-$1200 is quite possible.  I just don't see gold as a good value at its current price in that global recession scenario.  Message:  sometimes markets should be watched and not traded.

As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period.  The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle. 

I still consider stocks as a whole to be overpriced.  OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between.  Hint:  think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.