The first week of the second half of 2013 is in the books where we saw an Egyptian revolution, strong jobs numbers, and the market as measured by the S&P 500 increase by 1.59%. How does each of the scenarios impact the markets you ask?
- Geopolitical concerns in the Middle East typically make oil prices go higher (oil increased 7.3% since 01Jul13). Higher oil prices impact our wallets by causing us to pay more for gas.
- A stronger jobs report in the U.S. indicates that our economy is growing. There is a "catch 22" however, with a growing economy comes increased interest rates. Increased interest rates prevent people from making large sum purchases, such as homes. I believe higher interest rates will actually stunt the economic growth in this country if allowed to increase dramatically.
With these macroeconomic issues in mind I like to pick up stocks which have low valuations, double digit earnings growth, and low dividend payout ratios. Let's pause to take a look at what I've been buying for Abba's Aces this past week and see if I can pick some more up in the near future. The following screening criteria are what I use to select stocks into Abba's Aces:
1-yr EPS Growth
5-yr EPS Growth
Union Pacific (UNP)
While the S&P 500 was up 1.59% on this holiday shortened week, Apple was up 5.27%! When I wrote about Apple earlier in the week I stated that it is a stock that has all the attributes I'm looking for. As seen from the table above it exceeds dramatically on three out of four of the criteria I look for. I still believe in the stock even after its run-up in price this week, and believe it will be a second half story as new product launches are around the corner. Earlier this week the company hired Paul Deneve to be vice president of special projects. Paul comes from Yves St. Laurent, the French luxury fashion company where he was CEO. There is no telling what Paul will be working on yet but I wouldn't be surprised if he's working on an entirely new product line or two.
Unlike Apple, Abbott on the other hand was nearly flat (up 0.11%) on the week. It was flat due to recent news that the Chinese government is accusing foreign companies of increasing baby formula prices an exorbitant amount. I quite frankly don't believe Abbott, Mead Johnson, nor Nestle are doing anything incorrectly by charging high prices. The Chinese consumer has spoken that they don't mind paying up for a higher quality product simply because they just don't believe the domestic brands are safe enough. Just like Apple, I wrote that I believe Abbott is a stock, which provides excellent value, excellent earnings growth, and more room to grow its dividend. Currently it pays out a 1.6% yield, which doesn't provide much of a shelter from economic turbulence.
Union Pacific to me is the best of breed railroad operator. This week it was up 2.07% against the S&P 500's 1.59%. If you believe that the U.S. economy is growing then we will need energy, and Union Pacific is shipping about 90 million barrels of crude oil per year. Union Pacific doesn't offer much in terms of dividend yield when you compare it against its peers CSX (CSX) and Norfolk Southern (NSC). Union Pacific is also a bit more expensive based on valuations. I believe the higher valuation is warranted though because everyone wants to own the best of breed. Union Pacific is also one of these stocks I believe offers great value, earnings growth, and dividend growth.
With volatility looming in the market (rising interest rates, excellent domestic growth, geopolitical tensions) I believe the way to beat it is to get into stocks, which exhibit the characteristics of the table I included in the introduction. Fundamentally Apple is a great company, which trades inexpensively with respect to its 1-yr forward looking P/E value and will be buying it regardless of the price going up or not. Abbott and Union Pacific are fairly valued with respect to their future earnings and I will be buying only on any dips from here.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!