The market made a significant move higher on Wednesday after the market got news that the Fed would not be slowing its buying of bonds anytime soon. While the board members disagreed about the length of buying bonds, only a couple wanted to reduce the buying anytime soon. Several board members wanted to push bond buying to the end of the year. For now, bond buying looks likely to continue strongly, and with the Fed backing the market, stocks continue to gain in value.
Additionally, President Barack Obama presented his 2014 budget to Congress. The budget included some cuts to entitlement, a reduction in debt, but tax increases on the wealthy. The market did not react strongly to the news, and it will definitely be a debate for weeks/months to come as the government tries to sort another significant development. The Dow Jones (DIA) rose 128 points, while the S&P 500 (SPY) rose 19 points.
Stocks To Trade:
American International looks very solid, and it has been one of our top stocks for some time. AIG has great growth potential moving forward this year, and we believe that value is still there even with 12% growth this year already. First off, AIG's value is very strong. Future P/E is still under 10 and price/sales is at 0.9 (under 1 is a sign of great value). Here were comments from our previous article:
The company is making a HUGE turnaround. In 2013 and 2014, the company will see fairly flat revenue growth, but they are expected to see nearly 20% growth in earnings. Further, the company looks very likely to institute a dividend this year as well as a share buyback plan. Bernstein commented that the company will launch a $5B share buyback plan by mid-year. A share buyback plan will reduce shares outstanding by 1.48B to 1.35B, which is a major benefit to upside in the stock. And with value levels as low as they are, we do not believe that the deal has been priced into shares.
The latest quarter for AIG also was very positive. The company does a lot of its business in New York (around 5%). With Superstorm Sandy hitting a lot of homes, many believed the company would get hit hard. They got hit by Sandy, but the issues were short-term. As the company's CEO noted:
If you look at the underlying results, you've seen gradual improvement. The top line is holding steady. Our casualty line is coming down. We're making it up with better margin product. Our loss ratios for eight quarters are coming down.
And it's true, AIG is a very solid turnaround story. The company has sold off a lot of its assets, shored up its balance sheet, renamed most of its insurance offerings, and has gotten rid of most of the government shares. With the potential for earnings growth, strong value, potential share buybacks, and a dividend, we like AIG. The risk seems to be in the past, and with such great value, you can take advantage of other people's fear.
Trade: AIG, Long
Entry: Break of $41
Another stock we like right now is Urban Outfitters. The company looks like it could be in for a big quarter, and we like the looks of it moving forward. URBN is expected to see 26% growth in earnings along with 15% growth in revenue. Both rates are very strong for growth, and recent results from the company show strength. At the beginning of the month, URBN noted that same-stores sales have grown in the high single digits in the first two months of the FY. The 15% growth rate for the company factors in growth in new stores. In the past year, URBN has opened 57 stores:
Last year, the company opened a total of 57 new stores. This includes 21 Urban Outfitters stores, 15 Anthropologie stores, 20 new Free People stores and 1 BHLDN store.
Some note that more stores do not always mean more sales, but the company has shown strength to start the year even with fiscal cliff issues, sequestration, and tax raises. URBN is showing strength because it's a brand that is working very well appealing to a wide variety of teens, young adults, and even middle-aged individuals. Urban Outfitters appeals to young adults while Anthropologie and Free People are more appealing to young to middle-aged women at a larger income level. Further, Anthro/Free offer very solid margin levels for URBN. We believe URBN has a strong catalyst to continue higher given recent results, and a couple other notable catalysts.
The company's CEO noted that URBN wants to move into Asia with interest in Japan. With the company having no stores in Asia, the expansion into Japan and China could provide significant earnings and revenue for the company. That expansion is not at all priced into the stock at this moment. With strong sales/growth happening at stores, the company has found a niche in appealing to several aspiring upper middle class groups that like to spend money. These are the same individuals that buy high-priced groceries at Whole Foods (WFM) and home goods at Williams Sonoma (WSM). We believe this group of Americans is spending money at strong rates as URBN has noted as well as recent consumer credit data.
Trade: URBN, Long
Buy Point: Break of $41
One stock we are not a fan of right now is BP. We recently rated the company as a Sell in our new coverage of oil/gas companies, and we believe the company is the weakest offering in the integrated oil and gas industry. Why is that? First off, the overhang from the oil spill has not stopped. While the oil spill was long ago enough that the company should have recovered, it has not. Litigation against BP continues to happen, and the lawsuits against the company continue to happen. In fact, they may be growing. The company has noted that it could cost the company billions.
That risk, with so many other oil/gas companies present, makes BP unattractive to many investors, and until that changes, it makes BP unattractive to us. Due to the constant litigation and problems stemming from the Gulf issues, BP has drastically increased its cash/cash equivalents to be able to deal with these issues. Since 2008, cash/cash equivalents have gone from $8B to $19.5B in the past year. While that is attractive, capital expenditures have gone nowhere. This cash is being built to account for growing cases.
Additionally, we see asset sales from the government as a major negative for the company. The company has sold over $30B in assets since the spill. Why? The company has to sell assets to continue to shore up its balance sheet. The company is putting up its wind business for sale as well. While the company is an oil expert, we believe that the resources for the future of oil are limited. We believe companies that are moving towards diversifying their assets are much more attractive. Exposure to solar and wind are important for the future.
Overall, we believe BP has too much overhang and is making many choices based on the gulf spill still. Until this issue dissipates, BP remains unattractive to us. The news on April 5 from a New Orleans judge that the company would not be avoiding paying $8.5B in costs was a major negative in this fight. Additionally, oil prices may be coming under pressure as of late. Supply is very high right now, and with oil prices under pressure in the near-term, BP remains unattractive.
Trade: BP, Short
Buy Point: Under $41
The market has been very solid this week, and it could easily continue higher moving forward with the Fed backing the market. With that said, the market got a lot of its boost this week leading into the Fed minutes, and we had three days of the Fed buying bonds as well. Moving into Thursday, the market will likely get most of its reaction from the initial jobless claims report. Unemployment was very weak for March, and if the claims continue to show weakness Thursday, we could see some market correction for sure.
Charts courtesy of finviz.com.