A very good day in the markets Wednesday as better than expected earnings from IBM (IBM) and Intel (INTC) drove a 1.35% gain in the S&P index and larger increases in the other major indexes. Oil also gained roughly 3% and gold is hovering at $1500 an ounce.
Meanwhile the Federal Reserve continues to keep interest rates near zero and QE2 continues for another ten weeks. Gas is now approaching or surpassing $4 a gallon in most states and will surpass an all-time record soon. This will impact both consumer sentiment and spending in a negative way. The Greek 2-year bond yield just hit 22%, and its 10-year yields are near 15%. The market there is telling you a debt restructuring is on the way, which will be very negative for the banks and the markets overall.
I think it pays to be increasingly cautious here as we head into May. We might have another good few weeks as the earnings season plays out. However, I believe we are in for a rough summer. As I have been advocating for some time now, look for stocks with low valuations, good prospects, rock solid balance sheets, and a decent and growing dividend yield. Four stocks that meet those criteria that I am accumulating make up what I am calling the M.I.N.T. index. They are Microsoft (MSFT), Intel (INTC), Novartis (NVS), and Telefonica (TEF). I believe this Index will outperform the market during the rest of the year.
Microsoft: Microsoft is selling at nine times this year’s earnings after backing out net cash. The company has exciting new products and growth prospects, for the first time in the long time. Its Bing search engine continues to slowly take market share. Kinect technology will be used in many exciting ways outside gaming, including physical rehabilitation at home. Even its CRM product should find a good market in the corporate space. It has increasing earnings estimates over the past 90 days for both this year and next year. The company is benefiting as it is early in the upgrade cycle for Windows 7 and Office 2010. It has a dividend yield of 2.5%.
Intel: Intel had a ridiculously good earnings report the other day. Intel's profit grew 37% and revenue was up 25%. The company continues to show great growth in datacenter and emerging markets. Intel is selling at less than 10.5 times this year’s earnings and 10 times next year’s consensus estimate, which are bound to be raised. It yields 3.6% and has raised its dividend 150% over the last five years. It has consistently beat earnings estimate by a significant amount over the past four quarters
Novartis: This is another core holding that reported good results this week. Revenues were up 16% as Novartis got good growth with some new product launches. It posted net income of $1.41 a share, 10 cents better than expected. It is selling at a little under 11 times this year’s earnings and 10 time earnings expected in 2012. It yields a solid 3.6% and the company has raised its dividend over 150% over the last five years. It also has had an average EPS growth over the last five years of 11%.
Telefonica: Telefonica is selling at roughly ten times both this year’s and next year’s projected earnings. It yields a rich 5.5% dividend yield and has a price to cash flow ratio of just 5.2. It is taking market share from its main competitor in Brazil and Mexico. Its subscriber base in Latin America is expected to hit 340 million by 2013, which is an approximate 20% increase over 2010 levels. It also recently reaffirmed its commitment to maintain its dividend in 2012. Finally, Telefonica is trading at the lower quartile of its five year range measured by P/E, P/S, and P/CF due to problems in its home market of Spain.
Disclosure: I am long INTC, MSFT, TEF.