There are only two emotions in the market - hope and fear. The problem is you hope when you should fear, and fear when you should hope.
This is a famous quote from Jesse Livermore, a renowned trader who made and lost millions in the market. I believe it is quite appropriate at this juncture. I posit the market is at an inflection point, and the bulls are about to take control once the calendar clicks over to 2012.
The constant negative headlines out of the eurozone and China have slammed commodity prices, which ironically will be the catalyst that spurs the market higher. U.S. economic indicators are actually fairly good right now. I don't believe emerging market growth is slowing down anytime soon. I have been around long enough to know macro headline risk provides great opportunities to buy blue chip companies at discount prices. Market sentiment can and will turn on a dime -- mark my words. As we all know, in life, timing is everything, and the time is now to buy the following stocks.
The factors that determine the correct time to buy a stock are market macro state of affairs, sector and industry situation, individual stock technical and fundamental indicators as well as having a future company-specific product or service catalyst. This strategy was employed by famous investor William J. O’Neal. Now, all these stars align for a stock about as often as the galactic alignment, so the best you can do is choose stocks that are showing favorable characteristics in as many of these categories as possible.
In this article we will discuss the following seven stocks which meet some of these criteria: Apple Inc. (AAPL), Microsoft Corp. (MSFT), Oracle Corporation (ORCL), The Coca-Cola Company (KO), Intel Corporation (INTC), McDonald's Corp. (MCD) and Bristol-Myers Squibb Company (BMY).
Compelling Fundamental Statistics
The stocks discussed are the only S&P 500 buy-rated large-cap or better stocks with net profit margins of over 20% and returns on equity of greater than 20%. Furthermore, these stocks have great fundamentals and positive facilitators for future growth. However, many are trading at substantial values due to incessant negative macroeconomic headlines and a lack of confidence from Main Street, based on the ever-present deleterious employment picture.
A company's net profit margin is conceivably the most important statistic to understand before investing in a 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 that 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: First, 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.
Return on equity measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable.
High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share, you will be paying twice as much (in price/book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested.
Moreover, most are trading below consensus analysts' estimates, have recent upgrades and positive analyst comments. Below are three tables with detailed statistics regarding each company's current summary, fundamental and financial information.
Summary Statistics (click to enlarge)
Charts provided by Finviz.com.
Company-Specific Potential Catalyst
Rumors are starting to surface regarding Apple’s next iPad product, the iPad3. John Melloy, Executive Producer of CNBC’s Fast Money, wrote an article on Thursday with the best product description and detailed source information I’ve seen yet. I highly recommend you read the full article. Here is a short excerpt:
The iPad3 will be released in February with a high-resolution screen, a new selling point for the entertainment and productivity device that will drive Apple shares up 27 percent to $500 in 12 months, according to an analyst with Citi Investment Research.
“Current iPad builds are up sequentially in 1CQ12 (the current quarter) thanks to the February launch of a new iPad with double the screen resolution of the current model,” wrote Richard Gardner in a note to clients. “Several sources have confirmed the timing of this launch and there do not appear to be any significant technical hurdles remaining.”
General Electric, through its healthcare IT business, and Microsoft recently announced plans to create a joint venture aimed at helping healthcare organizations and professionals use real-time, system wide intelligence to improve healthcare quality and the patient experience. Upon formation, the new company will develop and market an open, interoperable technology platform and innovative clinical applications focused on enabling better population health management to improve outcomes and the overall economics of health and wellness.
Oracle recently released Oracle’s Siebel CRM Public Sector 8.2.2 – a component of Oracle Social Services Suite – to help public sector organizations become more responsive to shifting economic, social and policy environments, while maintaining a focus on improving program delivery and citizen service as well as streamlining program legislation automation.
One of the first commercial off-the-shelf software solutions created specifically for social services, Oracle Social Services Suite provides government agencies with a complete, open and integrated platform for eligibility and case management to help simplify eligibility determination, increase caseworker efficiency and improve program effectiveness. Public sector organizations – including social services, justice and public safety, constituent services and tax and revenue agencies – are choosing the newest Siebel CRM Public Sector release to supplement their case management solutions, as it provides a comprehensive, componentized solution to enable agencies to develop and implement their solutions in a fast, flexible and cost-effective manner.
The Coca-Cola Company
Great Plains Coca-Cola Bottling Company (Great Plains) recently announced that it has signed an agreement to be acquired by The Coca-Cola Company for the purchase price of approximately $360 million. Great Plains is the fifth-largest independent Coca-Cola bottler in the United States, with territories in Oklahoma and Arkansas.
Robert F. Browne, chairman and chief executive officer, Great Plains, said:
My family has been a proud part of the Coca-Cola System for nearly nine decades and has built Great Plains into one of the most innovative and successful bottlers in the U.S. The reason for our success is simple: From the beginning we have always strived to provide the best quality drinks with the best customer service. As I look to the future, I believe this is the right action to ensure the continued success of this business that I love.
Intel Corporation and Micron Technology (MU) recently announced a new benchmark in NAND flash technology - the world's first 20 nanometer, 128 gigabit multilevel-cell device. The companies also announced mass production of their 64Gb 20nm NAND, which further extends the companies' leadership in NAND process technology.
Developed through Intel and Micron's joint-development venture, IM Flash Technologies, the new 20nm monolithic 128Gb device is the first in the industry to enable a terabit of data storage in a fingertip-size package by using just eight die. It also provides twice the storage capacity and performance of the companies' existing 20nm 64Gb NAND device. The 128Gb device meets the high-speed ONFI 3.0 specification to achieve speeds of 333 megatransfers per second, providing customers with a more cost-effective solid-state storage solution for today's slim, sleek product designs, including tablets, smart phones and high-capacity solid-state drives.
During the Company's investor meeting recently, McDonald's Corporation Chief Executive Officer Jim Skinner and members of senior management reiterated the Company's commitment to its strategic plan - the "Plan to Win" - and outlined opportunities and investments to further modernize the brand, enhance customer relevance and sustain the company's performance for the future.
Jim Skinner said:
Over the past nine years the Plan to Win has been the right blueprint for McDonald's and remains relevant today. It has enabled us to perform well in both robust and challenging economic environments. Most importantly, the Plan is supported by our unparalleled competitive advantages in size and scale, our financial strength and our System alignment."
Bristol-Myers Squibb Company
Bristol-Myers Squibb and Simcere Pharmaceutical Group (SCR), a leading pharmaceutical company in China, recently announced that the companies have expanded the strategic partnership formed last year to include a second collaboration in a different therapeutic area. The companies agreed to co-develop BMS-795311, Bristol-Myers Squibb’s preclinical small molecule inhibitor of the Cholesteryl Ester Transfer Protein. Inhibiting CETP could potentially raise HDL (good cholesterol) levels and help prevent cardiovascular disease. This collaboration is expected to accelerate the delivery of clinical Phase IIa proof-of-concept by leveraging the complementary strengths of a premier Chinese pharmaceutical company and a global biopharmaceutical company.
The stocks discussed are blue chip U.S. multinational stocks. A blue chip is a stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. I posit these stocks have an extremely favorable risk/reward ratios coupled with significant upside potential based on macroeconomic, sector- and company-specific catalysts. These stocks have great stories and positive facilitators for future growth. However, many are trading at substantial values due to incessant negative macroeconomic headwinds and a lack of confidence from Main Street based on the ever-present unhealthy employment picture.
When the eurozone gets its act together and the global economy achieves viable economic traction, you can kiss the current share prices goodbye. I envision a day in the not-too-distant future where we will look back at current market levels in awe of the amazing values currently presented.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.