By Larry Gellar
Right when the market had been making steady increases, investors now find themselves confronted by a major stumbling block. Indeed, the problem of unemployment has reared its ugly head once again. Not only did the economy barely add any jobs in June, but also previously optimistic figures were revised downward. Although there is virtually no company that will be immune to such a broadly negative piece of news, some companies will still fare well in what seems to be a perpetually underemployed economy.
In many ways, a negative jobs report is one of the worst things that could happen to this market. The problem is that the economy as a whole could simply be hovering near an equilibrium in which unemployment never fully resolves itself. As this trend of unemployment continues, it will be harder for the economy to correct itself, which is why stocks like SPY and DIA are not the wisest moves available. The problem of unemployment is so broad that it would be counterproductive to try to capture the entire economy in buying a stock like SPY or DIA. As we will see, other industries should be less impacted by the negative news than others, so a more intelligent strategy would be to identify which sectors rely less on improving employment figures. Note that SPY and DIA have historically traded in lockstep, so it is hard to imagine one of these exchange-traded funds performing significantly better than the other.
If there is one industry that will be less affected by the U.S. unemployment problem, it is probably technology. The key here is that companies like Apple and Intel do not rely on a strong labor market to be competitive. So much of these companies’ supply models are capital-based that they will still do well despite poor employment numbers. Additionally, the companies who demand Intel’s products the most are also generally more capital-based. In fact, between Intel and Apple, Intel is probably better positioned to thrive in a persistently underemployed economy. Keep in mind that Apple’s business model relies more on confidence from Main Street than Wall Street in order to meet its full potential. Right now Apple is very cash-heavy, which may be a sign that the company does not have great investment opportunities unless the economy genuinely improves. Until consumer confidence is restored, there may be better picks in the technology industry than Apple.
Generally speaking, banking stocks do just fine when they’re not doing terrible. In other words, so long as the U.S. isn’t thrown into another financial crisis, banking stocks should perform reasonably well. Furthermore, it is important to understand the nature of the jobs problem. While it is certainly going to affect the economy negatively, there is no aspect of volatility to it. Companies will continue to adjust to a perpetually underemployed economy as they have been doing. The banking industry is no different. Specifically, financing and lending services will be diminished, but the overall profitability of these activities will not be seriously affected. Bank of America may have more exposure to a poor labor market than Wells Fargo, but keep in mind that BAC stock has more upside if the company can successfully resolve its legal issues.
How will Pfizer Inc. (PFE) perform in an underemployed economy?
If a substantial amount of the U.S. labor force remains unemployed, it is not hard to see why demand for certain consumer products would be negatively affected. On the other hand, Pfizer makes products that non-employed people all over the country are purchasing. Yes, it is America’s retirees that will continue to make PFE stock an unusually strong performer. Regardless of the unemployment rate, demand for Pfizer’s pharmaceutical products will stay strong. Watch for this stock to outperform even as the U.S. economy continues to malfunction. Statistically, Pfizer also looks primed to continue its strong performance. P/E ratio is only 19.13 compared to competitors like Merck (MRK) and Watson (WPI), which have P/E ratios of 68.28 and 54.91 respectively.
How about News Corporation (NWSA)?
News Corp. does not seem particularly safe or particularly vulnerable to the U.S.’s labor market problems. A more important headline for News Corp. may be the recent scandal involving its tabloid News of the World, but this does not seem to be an important factor for the company’s long-run performance. A wise strategy may be to buy the company now while it hurting from negative publicity, keeping in mind that the company’s valuation should not be affected. It is important to note that it should not be long before News Corp. starts another tabloid to take News of the World’s place. Another option the company is considering is to expand its other operations to fill the void – point being that, either way, News Corp. should be able to recover. Look for NWSA stock price to benefit as its P/E ratio beats both Walt Disney’s (DIS) and Time Warner’s (TWX) at the moment.
Ironically, a day before the actual Labor Department report was released, ADP released its own report saying that over 150,000 private sector jobs had been added to the economy in June. The Labor Department report did not paint such a rosy picture, and payroll processors like ADP and Paychex may be the companies that are hurt the most. Once again, the problem is that in some economists’ eyes, the U.S. economy may now run itself at a relatively high unemployment rate. It may take an enormous change in the way the economy works in order for unemployment to be reduced. This situation is unlikely, of course, given the current political climate. Additionally, it is not hard to see why a company that works mostly with labor management would struggle in an economy with a high unemployment rate. In many ways, it is a question of whether the employment problem is here to stay. If one believes that the nature of this economy has permanently changed, it would not be wise to purchase stocks such as ADP and PAYX.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.