Inside Wall Street: Get ready for a market rebound
Believe it or not, technical and fundamental underpinnings signal gains ahead. These stock picks make sense now.
Don't panic. That's the No. 1 rule that investors should keep in mind during intensely volatile market swings. More specifically, investors should not be goaded into panic selling.
I am aware that that isn't easy to do. But the market will get better. In fact, several seasoned and savvy pros argue that the market's current technical and fundamental underpinnings signal that it's time to buy U.S. stocks ahead of what they expect will be a sharp snap-back in equity prices.
True, there are headwinds galore that have instilled fear and great angst among investors, including the quagmire in Congress over deficits, taxes and spending cuts. And there's the messy European debt conundrum. The Dow Jones Industrial Average has dropped nearly 5% in five days, closing at 11,493.72 on Tuesday. The Standard & Poor's 500-stock index has also tumbled as much, closing at 1,188.04.
But incredible as it may seem, there are positives that should push U.S. stock prices higher.
Here's how the Standard & Poor's Investment Policy Committee sees it in an appraisal of the situation:
While European sovereign stress remains an ever-present headwind that we think will continue to drive periodic bouts of violent knee-jerk selling, we believe U.S. equities enjoy several positive offsets that will allow the asset class to continue to gradually appreciate in the coming year.
Translation: Stock prices are headed higher.
On the market's technical condition, this is how S&P's chief market technical analyst Mark D. Arbeter describes it this way:
We think the stock market is setting up for a large move, which we believe will be higher, as price volatility and trading volume have shrunk dramatically over the past couple of weeks.
He points out that the S&P 500 index is currently "tracing out a symmetrical triangle and is very close to completing this continuation pattern." Many times this pattern breaks or results in the next larger trend, which would be big move up, Arbeter says. Translation: A big surge in equity prices is imminent. Arbeter figures the S&P 500 could see "a measured move" to the 1,340 to 1,350 range.
Negative sentiment is a positive
The market's current sentiment is neutral and nowhere near a bullish extreme, which "leaves the door open for a fairly large stock market rally," Arbeter says. One of the potential catalysts for a breakout in the stock market, he argues, is a top in the U.S. dollar index, which to him appears to be peaking and may be headed for a test of its recent lows.
What about the wobbly economy? U.S. economic growth, while hardly stellar, is "generally exceeding very low expectations leading to reduced recession fears," notes the S&P Investment Policy committee, which is headed by Sam Stovall, who is also S&P's chief investment strategist.
The committee also notes that the S&P 500 earnings per share continue to grow at a healthy clip, with Wall Street expecting fourth-quarter 2011 and calendar-year 2012 profit growth of 9.7% and 8.6%, respectively, based on Capital IQ consensus estimates.
Another point the committee emphasizes is the market's cheap valuation. The S&P's valuation of only 11.6 times 2012 estimated per-share earnings "has room to expand as forward EPS projections are likely realized," the S&P panel says.
Now for some stock picks
Mark Travis, the president of Intrepid Capital Funds and the portfolio manager of Intrepid Capital Fund (ICMBX), says the market's current volatility has created ample opportunities for long-term investors with a horizon of at least three to four years.
"We focus on the value of a company's business rather than the price of its stock, based on our own valuation measures," he says. Often the price of a company's stock doesn't truly reflect the real value of the company, he says. Right now, there are plenty of companies selling on the cheap based on their intrinsic worth, he believes.
Travis says Bio-Rad Labs is an example of a stock whose intrinsic value isn't reflected in its price. Trading at $92 a share, it is down from its 52-week high of $126.98. He expects the stock will turn around and go back to its 52-week high. Bio-Rad, which has a market cap of $2.62 billion, is expected to earn as much as $7.75 a share in 2012, up from an estimated $6.70 in 2011 and $6.59 in 2010. Those numbers are a big jump from Bio-Rad's earnings in 2007 of $3.41 a share. The company makes an array of products that help life science researchers and technicians in separating complex chemical and biological materials to identify and purify their various components.
A.O. Smith, which manufactures residential and commercial water heaters, along with water purification systems, is trading at $35 a share, down from a 52-week high of $45.80. Already enjoying a leading market position in North America, A.O. Smith is aggressively expanding its presence in developing markets, notes S&P analyst Kevin Kirkeby. He says domestic construction markets continue to be weak, but he believes that new products and expansion into adjacent products will provide additional growth. Its revenues of $1.48 billion in 2010 are expected to jump 13% in 2011 and 14% in 2012. Kirkeby sees earnings of $2.05 a share in 2011 and $2.89 in 2012, up from 2010's $1.24. Rating the stock a strong buy, the analyst has a 12-month price target of $55.
McDonald's, the world largest fast-food restaurant company, with about 33,144 eateries in 119 countries, continues to grow and expand, particularly overseas. What's McDonald's appeal to investors these days? It's a "flight to quality" play at a time when there's concern about the U.S. economy, Europe's financial crisis, and consumer confidence.
"While visibility remains a challenge for the industry, we expect McDonald's to continue to prevail as a multi-national flight to quality," says Jeffrey A. Bernstein, analyst at Barclay's Capital. He rates the stock, now trading at $92 a share, as overweight, with a 12-month price target of $102.
"We see significant growth opportunities in international markets, in particular in Asia-Pacific, the Middle East, and Africa," says Jim Yin, analyst at S&P, who rates McDonald's as a strong buy. One thing going for McDonald's is its determination to constantly improve its menu offerings. McDonald will "gain market share with its wide menu offerings, as some customers trade down," says Yin, who says he is positive on the company's new menu items, including frappes and smoothies.
Yin has a higher price target of $109, based on his earnings estimate of $5.23 a share for 2011 and $5.78 for 2012, up from 2010's $4.58. The analyst concedes that he is concerned about a slowdown in the global economy. But he believes that consumers are still willing to make small discretionary purchases, such as meals and food at McDonald's.
Look at American Express
It is one of Warren Buffett's favored stocks, which is a huge endorsement of the company's success. A leading global payments and travel service company, Amex is best known for its ubiquitous credit cards, which remain an untarnished brand in the tightly competitive credit-card business.
"It has wide investor appeal," with its own solid financials and bright prospects for further growth and expansion, according to Ian Gendler, analyst at Value Line, an investment research company.
He notes that despite the high 9% unemployment rate in the U.S., weak housing market and uneven economic recovery, American Express will continue to post healthy earnings gains over the next few years. The stock is "a good holding for most portfolios," says Gendler, who figures it is undervalued at $46 a share. It is trading at just 12.3 times estimated 2012 earnings -- "well below its historical average." The analyst figures Amex will earn $4.11 a share in 2011 and $4.75 in 2012, up from 2010's $3.35.
S&P analyst Robert McMillan rates Amex as a strong buy, with a 12-month target of $58 a share. He says the credit card company's base of high spenders and credit-worthy customers have enabled it to grow despite a slowdown in global economic growth. So when the recovery finally gains traction, Amex should also be the big beneficiary. A brand that's highly recognizable worldwide, American Express deserves a place in most investor portfolios.
Gotta love an optimist but like the man said, "When you're nearing the bottom, the only way to go is up."
You guys slay me.
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