I'll be frank, as I have made some dire predictions for 2012. Do I believe a market catastrophe is on the way? The answer is no. What I do believe is that expectations for growth have been priced into the market. The US economy is slowly rebuilding but faces many challenges in 2012. Global growth is expected to slow in 2012 to less than 2%. The previous estimates, i.e. the ones used to pump up share prices, were over 3%. PIMCO's Saumil Parikh is estimating global growth at 1-1.5% in 2012, a full point lower than 2011. PIMCO is also estimating that China will slow more than expected as well. Mr. Parikh puts China at 7% growth, versus Chinese estimates for 8.5%. Regardless, China is slowing, Europe is slowing and the US is slowing. The domestic companies have been lowering guidance or reaffirming previously lowered estimates.
My point is that there is very little reason to expect an increase of market value. Investors are turning to more moderate strategies, looking for income in the form of dividends and options plays. I think it would be wise to carefully avoid potential whipsaws. Stocks trading near or just above resistance should be monitored for volume, short interest and fresh news. In the current environment it won't take much to send an already shaky company down to its knees. Large, multinational corporations will have it especially hard. Yes, there will undoubtedly be growth in some areas, but there will also be losses in others.
Take Procter and Gamble (PG) for example. PG is one of the highest-valued stocks of the Dow. It is trading about 17 times earnings, near the top of the scale in comparison to the rest of the Dow components. PG is paying a dividend in the amount of 3.16%, about average for Dow stocks. The Dow Dogs, which includes PG this year, average around 4% at this time. The average Dog for this year increased an average 17% when adjusted for dividends. PG is up a mere 6% when adjusted.
Procter and Gamble has been trending sideways for years, just like many of the Dow components. PG entered a trading range early in 2010, trading between $59 and $67. Its market indicators are consistent with a continuance of that trend. Momentum is weak in comparison to the moves sending PG up to its high near $75. In the short term, the stock is overbought with momentum turning bearish. PG is currently trading around $66, very near to the top of the current range. The 200 day moving average is basically flat. PG appears to be directionless but here is a lot of activity centered around the long term moving average. Trading during the second half of 2011 is very choppy with lots of gaps and no traction.
Looking at PG's financial statement it is plain to see that the company is still struggling to improve results. Total sales in 2011 are up about 5% over 2010 but are basically flat over a five year period. Operating cash flow made a huge decline in 2011, falling roughly 10% from 2010 to a five year low. PG was able to increase its net eps by 8% and consensus for next year is for additional growth of 16%. I think this number is unrealistic and leaves PG vulnerable to disappointment and shorting.
There are plenty of attractive investments in this sector. Colgate Palmolive (CL), Clorox (CLX) and Zep Inc (ZEP) are all presenting attractive opportunities. Zep Inc has been getting beaten up and is ripe for investment. In the 2011 Q4 earnings release, October 2011, Zep CEO John K. Morgan announced record revenues and a sales increase of 8%. The bad news was a 27% decline in per share earnings, based on the rising cost of raw materials. Management is focused on several growth vehicles which currently account for 40% of their revenue. This, compounded with efforts to stem costs, will help ZEP beat the Street. ZEP has been in a trading range for three years and is now trading around $14, near the middle of the range. Indications are good that ZEP will continue back up to the top of the range, increasing share value by over 60%.
Colgate has been trending up all year, making new highs and is forming a bullish triangle. Colgate has been increasing sales and EPS slowly over the past three years. Colgate also pays an attractive dividend, about 2.5%. The dividend will attract income investors and an earnings surprise will bring the rest, sending CL to another all time high.
Clorox is also trending up, despite a correction experienced at the end of 2010. Clorox spent most of 2011 building support at the $65 level and indicators suggest that support is growing. A measurable bull trend coupled with a 3.5% dividend yield makes it infinitely more attractive than PG. In the 2012 Q1 earnings call, which is for the period ending October 2011, Clorox reported a 2% increase in sales volume and a 3% increase in revenue. These gains were based primarily on an increase of market share, which put Clorox at an all time high for that metric. Clorox management expects growth to continue at a rate around 2% and reaffirmed EPS outlook for 2012, which are both very reasonable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.