The market surged in a volatile session Friday after Bernanke said the Fed remains ready to use additional tools to help the economic recovery, but stopped short of another round of monetary easing. The Dow plunged almost 220 points immediately after Bernanke started his speech, but swiftly recouped losses. "It is clear the recovery from the crisis has been much less robust than we had hoped," Federal Reserve Chairman Ben Bernanke said at the banking conference in Jackson Hole, Wyoming.
Bernanke said the Fed will meet for two days in September instead of the planned one day to discuss its options to provide additional monetary stimulus, among other topics. Bernanke went on to say he expects growth to pick up in the second half of the year. However, if signs of a recovery fail to materialize in the near-term, the FOMC may consider additional policy tools at its September meeting.
I agree with the “Bernanke” and I’m glad he did not succumb to the calls for QE3, which I believe was more hype than reality. When the market rallied 300 points last week the media outlets immediately started calling it the “Jackson-hole QE3” rally. It took the following couple of days for genuine traders and investors to talk down the rhetoric and correctly state that most investors don’t expect Bernanke to state he is going to start another round of QE3 at the Jackson-hole meeting.
Why didn’t he do it? Because he already stated he was going to keep rates down for the next two years! The Federal Reserve guaranteed super-low interest rates for two more years, an unprecedented step to arrest the alarming decline of the stock market and the economy. This bodes well for stocks in general.
With the Fed’s recent announcement that rates will remain at ultra-low levels for at least the next two years, we can see that fixed income instruments such as bonds and CDs provide little protection against inflation driving investors into stocks in search for yield.
Moreover, I submit we are experiencing a colossal case of the "Sell in May and go away" phenomenon. The sell in May and go away seasonal sell off is no myth, it’s a proven fact. The market’s seasonality in addition to the established predisposition to create a majority of gains from November to May and experience the greatest amount of losses in the contrasting period is well documented. A study by the Massey University, Department of Economics and Finance, Albany and New Zealand Institute of Advanced Study entitled “The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle” stated:
We document the existence of a strong seasonal effect in stock returns based on the popular market saying Sell in May and go away, also known as the Halloween indicator. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The Sell in May effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle.
I accurately predicted this precipitous drop in an article I wrote mid-May. I believe we are nearing the end of the correction and it’s time to start nibbling at the amazing buying opportunities created. Many stocks look really cheap and have dropped over 10%. I have culled 7 stocks from the masses that meet a strict set of screens.
These seven large cap or better stocks have positive catalysts for future growth, above industry average profit margins, below industry average P/E ratios, PEG ratios of less than 1, and positive quarterly EPS growth rates. These are bullish indicators regarding a stock's possible future performance. Robust profit and EPS margins are traits of notable names.
Moreover, most of these stocks are trading well below consensus analysts’ estimates; several have recent upgrades and positive analyst comments. Nonetheless, this is only the first step in finding winners for your portfolio. Please use this as a starting point for your own due diligence.
The PEG ratio is a broadly-used indicator of a stock's prospective worth. It is preferred by numerous analysts over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is undervalued. Many financiers use 1 as the cut-off point for PEG ratios. A PEG of 1 or less is believed to be favorable. As Warren Buffett would say, "Price is what you pay, value is what you get."
Regarding EPS, the earnings per share of a company is conceivably the most important statistic to understand before investing in a company’s stock. Each time you consider starting a position in a stock, you should prudently scrutinize its earnings information. The reason earnings are so vital to investors is because they tell you about the relative profitability of a company.
Earnings per share is defined as the net income of a company divided by the shares of common stock outstanding. With the EPS measure, you are looking at the amount of money left over for shareholders. The value is reported after taxes are subtracted, and we are normalizing those profits by stating them on a per-share basis.
When a company is profitable, and has money to give back to shareholders in the form of earnings, the company has two basic options. It can distribute some of the earnings in the form of a stock dividend. Factor this in with the fact that historically, dividend-paying stocks have outperformed non-dividend-paying stocks, and you have a recipe for outstanding returns.
After the precipitous drop in the Dow in 2008, the high-dividend-payers were the first to recover. Whatever is not paid out in the form of dividends is placed into the retained earnings, which then become a source of capital that can be used to help support the growth of a company.
The seven stocks that met all of these criteria are: Sun Life Financial Inc. (SLF), Raytheon Co. (RTN), ASML Holding NV (ASML), Discover Financial Services (DFS), Peabody Energy Corp. (BTU), Cliffs Natural Resources Inc. (CLF) and Dover Corporation (DOV).
Below are two tables with detailed statistics regarding each company’s current fundamental information, earnings per share and dividend information, followed by a brief review of each company, detailed current analysts' estimates and up/downgrade activity, followed by a chart of the company's key statistics.
Click on images to enlarge
Earnings and Dividend Statistics
Sun Life Financial Inc., together with its subsidiaries, provides various life and health insurance, savings, investment management, retirement, and pension products and services to individuals and corporate customers. The company is trading below analysts' estimates. Sun Life has a median price target of $32.34 by three brokers and a high target of $33.32. The last up/downgrade activity was on Nov 4, 2010, when RBC Capital Markets (RY) downgraded the company from Outperform to Sector Perform.
Raytheon Company, together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally. Raytheon has a forward price to earnings ratio of 7.23. The company is trading significantly below analysts' estimates. Raytheon has a median price target of $45.6 by 17 brokers and a high target of $62. The last up/downgrade activity was on Feb 18, 2011, when RBC Capital Markets upgraded the company from Sector Perform to Outperform.
ASML Holding N.V., through its subsidiaries, engages in designing, manufacturing, marketing, and servicing semiconductor processing equipment used in the fabrication of integrated circuits. The company is trading significantly below analysts' estimates. ASML has a median price target of $44.50 by four brokers and a high target of $47. The last up/downgrade activity was on Jan 11, 2010, when FBR Capital (FBRC) upgraded the company from Market Perform to Outperform.
Discover Financial Services, together with its subsidiaries, operates as a credit card issuer and electronic payment services company primarily in the United States. The company is trading below analysts' estimates. Discover Financial has a median price target of $28.50 by 18 brokers and a high target of $31. The last up/downgrade activity was on Aug 12, 2011, when RBC Capital Markets upgraded the company from Outperform to Top Pick.
Peabody Energy Corporation, through its subsidiaries, engages in the exploration, mining, and production of coal. The company is trading below analysts' estimates. Peabody Energy has a median price target of $75 by 19 brokers and a high target of $85. No Upgrade & Downgrade information is available for BTU per Yahoo Finance.
Cliffs Natural Resources Inc., a mining and natural resources company, produces iron ore pellets; lump and fines iron ore, and metallurgical coal products. The company is trading significantly below analysts' estimates. Cliffs has a median price target of $125 by 13 brokers and a high target of $144. The last up/downgrade activity was on Jun 13, 2011, when UBS initiated coverage on the company with a Buy rating.
Dover Corporation and its subsidiaries manufacture industrial products and components, as well as provide related services and consumables in the United States and internationally. The company is trading below analysts' estimates. Dover has a median price target of $72 by 11 brokers and a high target of $85. The last up/downgrade activity was on Jul 10, 2009, when Deutsche Securities (DB) upgraded the company from Hold to Buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.