Flight to Quality U.S. Stocks Reflects Relative Attractiveness

 |  Includes: GE, JNJ, SLB
by: Ben Marks

Any attempt to be clever in recapping a month that ended with what may be the beginning of a democratic revolution in the Middle East is going to fall flat. So I will stick with the facts.

Index Jan 2011 YTD 2011
DJIA + 2.7% + 2.7%
S&P500 + 2.3% + 2.3%
NASDAQ + 1.8% + 1.8%

The Dow Jones Industrial Average Index rose 2.7 percent for the month of January to 11,892, the best January performance in 13 years.

Markets were choppy as household names such as Amazon (NASDAQ:AMZN), Ford (NYSE:F) , Microsoft (NASDAQ:MSFT) and Procter & Gamble (NYSE:PG) reported disappointing earnings. Next in the disappointment cycle was GDP numbers that rose only 3.2 percent instead of the expected 3.5 percent.

In the final week of the month, investors took profits as fears swirled regarding leadership disarray in the Middle East. In general, a flight to quality U.S. stocks reflected their relative attractiveness, particularly as the risk premium grew for developing markets.

Banks are still sitting on their reserves rather than lending. We are watching weekly government reports on the money supply, waiting for a sign of increased lending, which may ultimately be the catalyst for inflation. These reserves and the foreclosed homes on bank ledgers are the reason we are still cautious about banks and remain under-weight in the financial sector.

A glimmer of hope may be seen in personal services expenditures. Since last May, Individuals have been steadily increasing their spending on salon services, dry cleaning, shoe repair, etc. (while personal interest payments have steadily declined). Volcanic ash spewing from a formation between Russia and Alaska’s Aleutian Islands has been named as the cause of post-Christmas snow in 49 states, breaking modern records in many of them. Were it not for that violent volcano, we may have been able to point to excellent retail sales and proof that consumers are more willing to spend on both goods and services. Recall that consumer spending accounts for two-thirds of Gross Domestic Product.

During January we banked gains from some of our best-performing stocks, bringing Donaldson (NYSE:DCI), NetApp (NASDAQ:NTAP), Starbucks (NASDAQ:SBUX), and Target (NYSE:TGT) back to model weights in Core Equity accounts.

We recently bought United Technologies (NYSE:UTX) on the belief that the company is poised for accelerated growth because it provides required services for a wide variety of productive machinery: Pratt & Whitney aircraft engines, Otis elevators, and Carrier heating and cooling. While others have recently de-conglomerated, UTX remains a one-stop industrials portfolio for investors. We believe it is attractively priced at about 1x its 14% estimated EPS growth rate over the next few years.

In order to maintain our existing weighting in the industrial sector we sold Tyco International (TYCO). We have been disappointed with management’s decision to deploy cash in stock buybacks rather than investing in research and development or acquisitions. We only invest in companies that invest in themselves.

Our International Equity portfolio employs approximately ten exchange-traded funds (ETFs) to invest in developed and emerging markets. Some funds are country specific, while others represent a region or sector. During the month, we sold the iShares Brazil Index Fund (NYSEARCA:EWZ) and DJ Euro Stoxx 50 (NYSEARCA:FEZ), bought the S&P Emerging Latin America (NYSEARCA:GML) and DJ Emerging Consumer Spending Index (NYSEARCA:ECON) and added to our existing position in iShares MSCI Switzerland Index (NYSEARCA:EWL) in order to reduce risk in Latin America and Europe. Let us know if you are interested in learning more about how we manage our portfolio of international ETFs.

Stock News

Johnson & Johnson (NYSE: JNJ) reported a 12% drop in profit and a disappointing outlook amid decreased spending, particularly in over-the-counter products following mid-year product recalls. The quarter included expenses related to litigation settlements, product liability costs, and last year's recall of hip-replacement devices. We believe sales and earnings should begin to reaccelerate, and that the shares are attractively priced.

Schlumberger (NYSE: SLB) beat Wall Street estimates on both revenues and earnings, raising the dividend by 19%. The recent Smith acquisition was dilutive to EPS by 5 cents, and management spoke of further dilution for the coming year along with pressure on natural gas drilling revenues. The stock is up 6.6 percent year to date driven by higher oil prices.

General Electric (NYSE: GE) reported revenue up 1% or 5% ahead of expectations driven by Health Care technology infrastructure. This is the first quarterly revenue gain in 9 quarters. Management indicated that real estate delinquencies were down 2%, a pleasant surprise for the economy as a whole.

In last month's market recap, we inadvertently attributed a gas discovery off the coast of Israel to Core Equity holding Noble Corp. (NYSE: NE). It was actually struck by Noble Energy (NYSE: NBL). We apologize for the error.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with Marks Group Wealth Management or another trusted investment adviser. Marks Group Wealth Management performs in-house analysis on companies. Statistical information on mentioned companies is obtained from company reports, news releases and SEC filings. The information set forth herein has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the securities, companies or industries involved. Opinions expressed herein are subject to change without notice. Additional information is available upon request. Past performance is no guarantee of future results. Stock investing involves market risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Precious metal investing is subject to substantial volatility and potential for loss. Commodities are subject to fast price swings which can result in significant volatility in an investor’s holdings. International and emerging market investing involves special risks such as currency fluctuation and political instability.