[Excerpted from Marks Group Wealth Management's Monthly Market Recap]
This summer’s yo-yo market continued in August. After an impressive rally in July, the major U.S. equity indices gave up most of those gains this past month.
INDEX AUG 2010 YTD 2010
As the de-leveraging of the U.S. consumer continues (which isn’t all bad by the way), it appears that the markets need to adapt to an extended low growth economy. In this environment we believe that high quality large cap stocks offer the most compelling long-term potential.
This past month provided further evidence of these stocks’ relative safety as our positions such as Verizon (VZ), Kimberly-Clark (KMB) and General Mills (GIS) bucked the market trend and moved higher. Many of our large cap holdings offer the added bonus of dividend yields higher than the 10 year treasury. We also believe that quality earnings growth will fetch a premium in industries that are well positioned in today’s economy.
Our recent purchase of Johnson Controls (JCI) (details below) exemplifies this theme with their dominant position in energy technology. Although not nearly as publicized as the dismal macro economic news, there is a consistent flow of M&A activity as cash rich large cap companies buy up the competition. This action, along with the lack of initial public offerings, is marginally reducing the amount of outstanding shares, thereby shrinking supply.
Of course in order for this to matter, there needs to be renewed demand for stocks and we don’t expect that before the mid-term elections. Historically the stock market, as measured by the S&P 500, rises just 1.2% in the months leading up to the mid-term elections, but post-election stocks gain an average of 3.2% for the remainder of the year. (Source: Barron’s, “The Trader”, 8/30/10.) History doesn’t always repeat itself, but these statistics are encouraging. In the meantime, be prepared for uninspiring macroeconomic news and ear-splitting political rhetoric. Last Friday alleyes were watching the number of jobs that were created in August when U.S. non-farm payrolls are announced.
Johnson Controls: Continuing our discipline of owning industry leading domestic companies, we added shares of Johnson Controls to our Core Equity portfolio in August.
JCI’s origin goes back to 1883 when company founder Warren Johnson patented the Thermostat. Since then, the company has spent 125 years quietly growing into a $20 billion juggernaut that has three primary divisions – Building Efficiency, Automotive Experience, and Power Solutions. Recently, the fastest-growing division has been Building Efficiency, which makes and services products used in the heating, ventilation, security and lighting of large buildings for governments, colleges and corporations.
Last year the company announced it will be retrofitting all of the mechanicals in the Empire State Building, which guarantees energy-cost savings that will pay for the entire project in less than four years. As more and more large buildings “go green”, we see Johnson Controls well-positioned with a growing and sustainable business model. (Barron’s 8/16/10)
BP: Despite BP’s battle with Halliburton (HAL) and Transocean (RIG) at last week’s federal investigation hearing to help determine responsibility for the Macondo well explosion, shares of BP have recovered more than 25% from the lows in late June. Over the past 60 days, the gulf clean-up continues to proceed quicker and cheaper than originally estimated. The capping of the well, coupled with the oil being dispersed and neutralized by microbes will likely keep the total clean-up cost far below the $60-$80 billion worst case projection.
BP also announced that Managing Director and Mississippi native Robert Dudley will become the point man for the oil spill recovery. Dudley will also become BP’s first American CEO on October 1st when he relieves current CEO Tony Hayward who will then “get his life back.” (Gimme Credit 8/30/2010)
3M Corporation (MMM): 3M has been working overtime on its deal-making efforts this week announcing back-to-back deals on the final two days of August. It plans to purchase Cogent Inc. for $943 million, paying a nearly 18 percent premium for the maker of identification systems used to screen travelers at border crossings.
Their technology recognizes finger and palm prints as well as irises and faces. 3M also agreed to pay $230 million in cash for Attenti Holdings SA, an Israeli company that makes ankle bracelets and other products used to keep track of people. Annetti’s products use both GPS and radio frequencies to track the movements of those awaiting trial or on probation, and patients in senior care centers.
Both deals come as part of an effort by 3M to expand its security services products. 3M Chief Executive Officer George Buckley said last week that the company could spend $2 billion on acquisitions this year, double its previous estimate. (Bloomberg 8/31/2010)
Intel Corporation (INTC): Less than 30 days after posting its best quarter ever, Intel shook off an earnings warning and continued their acquisition spree by purchasing security software maker McAfee Inc for $7.7 billion. The deal will be Intel’s largest acquisition ever and will give the world’s biggest chipmaker a leg up in the area of securing web-enabled devices such as Smartphones and tablet PC’s.
Intel also agreed to acquire Infineon Technologies AG's Wireless Solutions Business for $1.4 billion in cash. The acquisition expands Intel's current Wi-Fi and 4G WiMAX offerings to include Infineon's 3G capabilities and supports plans to accelerate wireless connectivity. (Reuters 8/30/2010)