Still a strong case for these 2 picks
Despite worsening turbulence in Europe, these stocks still rate a buy.
By Genia Turanova, Leeb Income Performance
It was a little more than two years ago that the first loan package for Greece was announced. At that time, the market didn't believe the $146 billion package was enough to solve the problem. Two years later, it's more than obvious that it failed to stop the contagion.
The survival of the euro itself is increasingly being called into question. Greece, whose crisis has only deepened over these two years, is the first candidate for a potential exit from the union.
But of course, Greece isn't the only country whose problems have been dominating the minds of investors. The changes in the political landscape there are just another reflection of how the ongoing crisis is working its way through society, and how unpopular the austerity measures are. Concerns about the European slump deepening and/or the prospects of another deflationary event are mounting.
Meanwhile, China has reduced its dollar holdings to their lowest level in a decade, and is working hard to end the greenback’s reign as the world’s reserve currency. What does this portend for you?
Despite some deterioration in U.S. data lately, the economic picture here is still encouraging.
Even with the disappointing first-quarter GDP growth figure reported recently, we have enjoyed a very decent earnings season, which would have been impossible if the economy was grinding to a halt.
Over the past few weeks, the markets have begun discounting the weak GDP growth and the possibility of deterioration in Europe. Treasury prices went up as yields plummeted, and the S&P 500 declined, with defensive stocks performing relatively better: Quarter-to-date, as of Wednesday's close, the Standard & Poor's 500 Index ($INX) was down 3.8%, but telecoms and utilities, both being defensive sectors, were up.
Although stocks most leveraged to economic growth have been under the greatest pressure in the second quarter, it's important to note that the stock market remains 8.5% higher on a year-to-date basis. Clearly, no widespread panic has been registering here in the US.
Case in point is Cisco Systems (CSCO), a member of our Growth & Income Portfolio. Its shares have been down sharply since the company, having met expectations for the third quarter, forecasted weaker-than-expected results for the rest of the year, saying that it's difficult to predict second-half performance in this environment.
The company's concerns about the European economy and enterprise IT spending are understandable. The question now is whether its current valuation and yield justify holding the shares.
We think they do. The shares are trading at 11 times forward earnings, a valuation that reflects much lower growth expectations. But the bear case is now fully known, while the company did execute very well in the quarter, which was characterized by a particularly difficult macro environment.
Outside of a macro-shock and/or a significant increase in interest rates, we think the shares of this market leader, at these levels, present a buying opportunity. Plus, Cisco has about $6 of cash per share on its balance sheet and, at 1.9%, yields more than the ten-year U.S. Treasury. We are less bullish on the stock today, but we would still be buyers at these levels.
On the other hand, the shares of Windstream (WIN), which are also down, have declined because the company missed estimates. The reported results were hurt by lower revenues in Windstream’s consumer and wholesale segments.
Guidance also disappointed as management pointed to the lower end rather than updating and upgrading it, suggesting a revenue decline is in store. On a positive note—and that’s the reason the shares recovered from earlier lows—the dividend seems supported. The payout is less than half of the free cash flow the company has generated.
We reiterate our buy recommendation for the stock based on the 10% dividend yield. But we are watching Windstream for signs of further business deterioration, and won’t hesitate to sell if we see decelerating trends down the road.
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