MARKET IS OBSESSED WITH BERNANKE, DEBT CEILING AND EUROPE
So much of the financial media is fixated on a small handful of topics. Sure, they're important issues, but it seems like the days change and the headlines remain the same. Yesterday, the media was abuzz about the Federal Reserve's willingness to use further stimulus if the economy weakens. As a result, the dollar plunged, gold surged and stocks rose. Not to be outdone, afternoon headlines were dominated by talk about the US debt situation and a warning from credit rating agency Moody's that they could lower the sovereign credit rating because of the small but growing risk of default. And of course, when these domestic headlines need a rest, journalists can always fall back on the developments in Greece and Europe. Or they can even feed the hype about hot technology companies like Facebook which could be worth $200 billion.
NOT AS THEY APPEAR
Call us crazy, or call us a contrarian. Actually, please just call us contrarians. But we don't think the above mentioned headlines have the same potential market moving effects as you would think. Bernanke has never been shy about his policy view and as a result, it is not a surprise that the Fed chairman continues to view monetary easing as an effective weapon to carry out their dual mandate. Secondly, the prospect of a U.S. default sounds dramatic, but how can any market watcher view this as a likely outcome when Greece has avoided default even when many Greeks would favor that outcome? Finally, the European crisis (yes Europe, not Greece) is probably one of the biggest risk factors in the marketplace. As David Einhorn discussed in Greenlight Capital's most recent shareholder letter, there could be a hidden risk among European banks that sold credit default swaps on sovereign issues.
PAY ATTENTION TO THESE COMPANIES INSTEAD
Let the storylines play out in Washington and Europe. In the meantime, the earnings reports from the below listed companies are far more important.
Google Inc (NASDAQ:GOOG) - Thursday, July 14
It was not long ago that Google was the hottest company in the market. They were the one that drew the constant bull/bear debates. Revenue growth is still impressive, margins are still strong, growth opportunities are still interesting and valuations are reasonable, but now the market is generally indifferent. Instead, market watchers would rather follow the next generation of technology stocks like Facebook, Groupon, Pandora and LinkedIn.
Investors should not make this mistake. We think Google is a far superior investment to many of the newest technology IPOs. Google is an interesting opportunity worth a closer look. The company trades at a trailing P/E of 20.90, a forward P/E of 13.69, a PEG ratio of 0.87 and profit margins of 26.8%. But GOOG has a large amount of excess cash and investments. Excluding this excess liquidity, the trailing P/E is closer to 17 and the forward P/E is closer to 11.09.
But aside from the reasonable valuations for a company with growth and a leading market position, there is much more to the story. In addition to the continued opportunities from the secular growth in online advertising through traditional internet use and through mobile devices, the most exciting growth opportunity is Google+. Though the roll out is still in its early stages, investors will likely crawl all over the little details that we learn from Google+ adoption. Any traction at all in the social networking business could be hugely accretive to Google. Not only does social media drive sizeable traffic, the traffic itself is typically a high quality and a long duration.
JPMorgan Chase & Co (NYSE:JPM) - Thursday, July 14
The financial industry struggled during the recent stock market rally and the banks were no exceptions. The market desperately needs some guidance and there is no more trustworthy figure among the banking industry than JPM CEO Jaime Dimon. Revenues are expected to be bad at the investment banking division with trading weak across the industry. But Capital One (NYSE:COF)'s recent earnings strength could provide a spark for the industry. If the credit card segment reports strong earnings, this would be positive for the stock, but if the this decline in delinquencies has broader implications for the bank's other loan portfolios, this could be very positive for JPM and other bank stocks.
At a trailing P/E of 8.80, a forward P/E of 7.05 and a price/book of 0.91, JPM is reasonably priced for one of the world's premiere banks. The company has a strong market position domestically and a growing presence abroad. Trailing earnings were generated by 0.90% returns on assets. With $2.2 trillion of assets, the company is leveraged for good news.
Citigroup Inc (NYSE:C) - Friday July 15
The money center bank is so depressed that it has tremendous potential upside to any better than expected news. The trailing P/E is 12.91, the forward P/E is 7.56 and the price/book is 0.67. The market is likely already pricing in weak margins and revenues at their sales and trading operations. Any surprise to the upside should drive the stock higher. In addition, investors will be paying close attention to the net interest margin on loans and the trend in delinquencies and provisions for loan losses.
The upcoming earnings reports are not just a company specific events. Google, JPMorgan and Citigroup are such large and integral companies in this country that they have the potential to move their industries and the broad market. For example, in addition to JPMorgan's results, investors should also pay attention to any clues about what the bank is seeing in the broader economy. In this sense, JPM could tell U.S. more about the state of the economy than Ben Bernanke.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM, GOOG over the next 72 hours. I own C