September Recap: The Best September Showing Since 1939

by: Ben Marks

[Excerpted from Marks Group Wealth Management's Monthly Market Recap]

To repeat a phrase that I read in Barron’s last weekend, this year’s market pivots from a funeral to a party as fast as a VFW hall.

INDEX SEPT 2010 YTD 2010
DJIA + 7.72% + 3.45%
Nasdaq + 12.04% + 4.38%
S&P500 + 8.76% + 2.34%

September was a party, with domestic and international equities both rising handsomely. Economic data stopped deteriorating enough to get the talking heads to stop babbling about a double-dip recession. This along with ridiculously low yields on fixed income securities prompted investors to take their chances with equities, resulting in a solid four week rally - the best September showing since 1939.

Increased M&A activity also contributed to the September rally as cash rich companies with access to cheap financing pulled out their checkbooks. For the quarter there were $562 billion of announced transactions, the busiest quarter in two years (source: Bloomberg). A good example of high quality companies’ access to inexpensive capital was Microsoft’s (NASDAQ:MSFT) $4.75 billion debt offering last week. The company issued a three year note at a yield of 0.931%, the lowest interest rate on record for a corporate bond of that maturity, according to Barclays Capital data.

This recent activity supports our conviction that patient investors in high quality U.S. stocks will ultimately be rewarded. These companies are able to gain market share as they acquire smaller competitors and complementary businesses at reasonable valuations.

Ultimately, as the global economy recovers these high quality companies will be positioned to experience significant earnings leverage as these recent acquisitions start contributing to the bottom line through increased sales and pricing power. In the meantime they will be able to withstand an extended slow growth economy while their weaker competitors fail.

The 1000 largest companies in market value worldwide have amassed $2.87 trillion in cash and equivalents, based on data compiled by Bloomberg. This cash is getting put to work through acquisitions, stock buy-backs and increased dividend payments, all of which are beneficial to shareholders.

I would not, however, expect immediate gratification. The deflationary pressures on the economy from housing, commercial real estate and wages will continue to create headwinds for economic growth. We probably haven’t been to our last funeral at the VFW hall.

Stock News

Oracle (NASDAQ:ORCL): Shares of Oracle jumped more than 20% in September as investors cheered the software powerhouse’s strong first quarter earnings report. Oracle reported net income of $1.35 billion, or 27 cents a share, compared with a profit of $1.12 billion, or 22 cents a share, for the year-earlier period. Revenue rose 48% to $7.5 billion.

The world’s second-largest software company reported a 25% year-over-year gain on new software licenses and also showed strength beyond its core software business, proving that its recent acquisition of hardware maker Sun Microsystems is paying off.

Oracle had a major announcement in September when they hired former Hewlett Packard (NYSE:HPQ) CEO Mark Hurd as President, reporting to CEO Larry Ellison. At HP, Hurd more than tripled profits by cutting costs and expanding beyond the company’s core business of computers and printers. Oracle, which has also grown via acquisitions, could draw on Hurd’s background integrating software and hardware as it expands into server sales. (Bloomberg 9/20/10)

Johnson and Johnson (NYSE:JNJ): In mid-September JNJ contributed to the M&A boom of the third quarter by announcing it will acquire the rest of Dutch vaccine maker Crucell NV (NASDAQ:CRXL)for $2.3 billion. JNJ previously held an 18% stake in the company.

The deal would be the biggest for J&J, the world’s largest health products company, since its 2006 purchase of Pfizer’s (NYSE:PFE) consumer unit for $16.6 billion. This will enable JNJ to further expand in flu shots to bolster sales after two former top-selling drugs lost patent protection. Industry analysts believe the Crucell acquisition will give J&J a vaccine platform at a time when the vaccine business is becoming increasingly attractive because of its cost-effectiveness, limited exposure to generics and growth opportunities.

The global market for vaccines totaled $22.1 billion last year, up from $19 billion in 2008, and will expand 9.7 percent annually in the next five years, according to Kalorama Information, a market research company, in an Aug. 12 report. (Wall Street Journal 9/17/10)

Cisco (NASDAQ:CSCO): In a highly anticipated move, Cisco announced that it will begin paying a dividend before the close of its current fiscal year ending July 31, 2011. The dividend yield will be in the range of 1-2%, with a mid-range estimated annual payout of $1.9 billion. Cisco has previously faced calls from investors to return some of its fat cash position to shareholders. As of July 31 Cisco held nearly $40 billion in cash on its balance sheet.

Cisco has previously used its excess cash to fund acquisitions and repurchase its shares. According to SEC filings, Cisco has spent more than $65 billion on stock buybacks over the past decade. Cisco also announced a strategic partnership with smart meter maker Itron in early September.

Under the agreement Cisco will license and imbed its IP technology into Itron’s OpenWay meters. Itron will also distribute Cisco’s networking gear and software as part of its smart meter deployments to utilities. We believe this non-exclusive agreement will significantly advance Cisco’s smart-grid networking market strategy. (Credit Suisse 9/1/10, Gimme Credit 9/14/10)

General Mills (NYSE:GIS): General Mills continues to attract US consumers with new products such as Chocolate Cheerios and Wheaties Fuel, even as they continue to keep tight budgets. The innovation helped the company post a 12% gain in profit and exceed analysts’ estimates. Cereal sales rose 4 percent in the U.S.. Snack sales advanced 5 percent, aided by new grain bars and fruit snacks.

The company is also developing new soups, such as four Mexican-inspired flavors. Despite industry-wide promotional programs that continue to cut prices at grocery stores, General Mills was able to generate sales that were ahead of estimates. “We may be launching fewer innovations overall, but products like Chocolate Cheerios and Yoplait frozen smoothies have really made an impact,” CEO Kendall Powell said in an interview. “We are making fewer bets, but bigger bets.” (Reuters 9/22/10)