The debate continues to rage daily, on CNBC and elsewhere, about whether this recent pullback in the SP 500 and the major equity market indices is just a badly-needed correction, or something more sinister, as some technicians point to the 1929 charts and draw analogies to today's Dow Industrials chart.
As of Monday, February 3rd, 2014, after the sharp market decline to start the month of February, the SP 500 was down year-to-date in '14 about 5% - 6% and there was starting to be a little fear in the market.
My own opinion is that with a 14.5(x) forward P/E ratio on the SP 500 based on an expected 2014 earnings per share (EPS) estimate for the SP 500, and expectations for 8% - 9% earnings growth this year, not to mention a 2.4% dividend yield, and a 6.75% "earnings" yield on the SP 500, there just isn't a lot of froth or excess in the key benchmarks, particularly if we stick with some of the larger market-cap's and giant brands.
We have been eyeballing a number of charts as they reach longer-term support levels and have been picking away at the following stocks since Monday, February 3rd, 2014:
Wal-Mart (NYSE:WMT): the grand-daddy of all retail, WMT lowered guidance the last day of their fiscal 4th quarter, 2014 last Friday, which really wasn't unexpected given how retail has performed generally since mod-November, and given the absolutely brutal Midwest winter this year, particularly from a snowfall perspective. Even though business and comp's improved sequentially in Q3 '14, WMT lowered guidance coming into q4 in November and then lowered it again last Friday, after the double-whammy of weather and the SNAPS food-stamp program.
Technically, if WMT holds the January, 2000 high of $70.25, the breakout which began in August, 2012 when WMT traded back above $70.25 remains intact. Growth is much slower for the retail giant, as you would expect, but if we could get a little inflation, and get past the government shutdowns, tax increases, welfare spending reductions, and benefit decreases, not to mention continue to show steady job growth, WMT should be able to return to mid-single-digit revenue growth and high-single-digit EPS growth.
In calendar '14, even after the 2 guide-downs analyst consensus for WMT is looking for 4% revenue growth and 9% EPS growth, despite numerous headwinds. Trading at 14(x) next year's earnings and 10(NYSE:X) cash-flow the retail giant isn't screamingly cheap, but WMT has negotiated the US economy very well, and can grow in almost any environment.
I do worry about the 5 straight quarters of inventory growth being faster than sales growth, which is very "un-Wal-Mart" like, so we will be watching inventories in the earnings call later in February '14.
Our stop-loss would be a trade below $69 on heavy volume for WMT. That would tell me that the stock will need to spend some time in the $60's before running higher.
Procter & Gamble (NYSE:PG): The consumer-branded giant has traded down from the low $90's to the $75 - $76 range and is currently testing its December, 2007, high of $75.18.
I would have to think the recent emerging market volatility, but the longer-term story for PG is that volumes will have to grow out of this low single digit range that they have been locked in for a few years, although pressure will likely occur in margins at the same time, as PG will likely need to lower prices to drive volume growth.
PG could offset the margin pressure with expense reductions, but it is currency that is impacting PG's results currently: in the December '13 quarter just reported, forex volatility cost PG $0.11. PG guided '14 to include a 2% forex hit, which was better than the original 6% guidance, so the recent emerging market currency volatility might be playing havoc with analyst models and 2014 assumptions.
It might be easier for readers just to "go American" in terms of investing currently, and avoiding emerging market and international currency volatility, but these disruptions can often mean long-term opportunity.
PG isn't really cheap on a p.e basis trading at 18(x) fiscal '14 earnings for expected growth this year of 5%. The cash-flow valuation isn't cheap either at 15(x) 4-quarter trailing cash-flow, but this is the kind of stock that never trades cheaply on a valuation basis. The value of the PG brand is enormous, and it is the gift that keeps on giving.
We wouldn't want to see more currency volatility in Latin America, but as long as PG continues to push volume through price cutting and stave off margin erosion through expense reductions, PG could see their way through this period.
The continued turnaround will be a slow slog for PG, and the "macro" is making their job any easier. However, this company is a quality blue-chip, consumer staple with a rock-solid balance sheet and cash-flow. Stay with it. We think PG's intrinsic value is high $80's, low $90's with current organic growth, margins and cash-flow.
A trade below $74 on heavy volume would not be well received.
Boeing (NYSE:BA): Boeing's stock has fallen from $140 to trading under $120 briefly today, Wednesday, February 5th, 2014, since their last earnings report.
2014 and 2015 consensus EPS estimates continue to work higher so we aren't sure why the stock has suddenly taken gas. We think in the $120 area the stock is a buy, with the 50 week moving average sitting down near $110.
The last Q4 '13 earnings report was solid: BA management was thought to be typically conservative with their '14 outlook. BA is expected to grow EPS 5% and 12% in 2014 and 2015, after growing 38% in '13. Trading at 16(x) the 2014 estimate, BA is not unduly expensive, since it seemed cheap all of last year.
I simply think the pullback in the stock currently is just a healthy correction and another opportunity to own a quality blue-chip at a reasonable valuation.
Ultimately I think BA is worth in the high $180 - $190's per share, given their backlog and lighter, more fuel-efficient planes. It will take some time to consolidate this decline, As long as the emerging markets don't come completely apart, and global GDP growth continues to improve, BA should base technically in this range and start a 2nd move forward later in '14.
Ford Motor (NYSE:F): although GM seems to be the flavor of the month, we think Ford under $15 is an attractive valuation. Ford management dropped a bombshell on Street analysts with their '14 guidance in mid-December '13, but management tends to guide conservatively, as they did with Europe in 2013.
The stock is trading at less than 10(x) earnings for an expected '14 EPS decline of 15%. The entire earnings shortfall is due to an extra $1.5 billion in additional launch expenses for the 20 - 23 models that are expected to be launched in 2014.
My own guesstimate is that Ford could do $1.50 in 2014, despite the current consensus.
Our intrinsic value estimate for F means we will eventually be a seller near $22 - $25 per share. It may take a few years to get to this price level. Total return from today's market price of Ford ($14.73) to our intrinsic value estimate is a potential 50% - 60% return not including the dividend.
These are some of the names we've been picking away at, in the downdrafts this week. Some of these names could trade lower from here, but we think current levels represent good risk-reward.
All these companies are long-time, American brands with solid balance sheets, cash-flow and dividends, and represent reasonably-valued risks at current levels.
Disclosure: I am long WMT, PG, BA, F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.