In the first part of this article, we discussed some stocks that made headlines for a variety of reasons and what effect market news will have on their movement. We started the discussions by acknowledging the disappointing end of the fourth week of trading in the new year. The Dow capped its first weekly loss in the month - which leads many investors to wonder if indeed the so called "January effect" ended last week. Friday brought some profit taking as several of the indices ended lower. It appears that investors seemed undecided about which course to take and how to digest the news that the U.S. economy grew more slowly than expected in the last three months of 2011. But to me, the silver lining is that it is indeed growing again. But I appreciate that not all investors have the "glass-half-full" mentality - as evident by the market's reaction on Friday.
The economy grew a modest 2.8 percent in the fourth quarter of 2011. However, many economists caution that the pace was unlikely to last and that it's not enough to sharply drive down the unemployment rate - which at 8.5 percent is its lowest level in nearly three years. Reports suggest that in the last quarter of the 2011 the item that Americans spent the most money on were new cars - which then forced companies to restock their supplies at a robust pace. So for stocks that rely heavily on new car sales to further their growth such as Sirius XM (SIRI), needless to say this was favorable news. Now investors know where the 540K Q4 net subscribers came from.
The good news is that the Fed got in on the action and assured investors that short term interest rates will be kept as close to zero as possible at least until the end of 2014. This may or may not be enough to drive the January momentum into February, but it certainly can't hurt. As disappointing as it is to see the indices down, it is not a surprise as I think taking profits at the juncture is indeed the right thing to do considering that the S&P500 is up a 5 percent for the year - a pullback has to be just around the corner. I'm sure that I am not the first to say this, but the market does indeed appear overbought. Having said that, there are some equities within the market with yet room to grow - here are a few of them that made headlines this week.
Whenever discretionary spending becomes a concern, it has to affect companies such as Netflix. The streaming media giant certainly raised some eyebrows with its recent Q4 earnings report that arrived better than expected. For Netflix it was like night and day from one quarter to the next. On Wednesday the company said that it has gained more than 600,000 subscribers in the fourth quarter. This compares to the 800,000 that churned out in the third quarter which resulted in the stock plummeting to its recent lows.
It also reported profits of $41 million of 73 cents per share on $876 million in revenue - topping analysts' expectations of 54 cents per share. This prompted Arvind Bhatia of Sterne Agee to say "We are incrementally bullish on shares of Netflix following the 4Q results." Shares jumped as much as 20 percent in pre-open trading on Thursday and reached as high as $119 and ended the day at $116 which culminated in an additional $7 increase to close Friday at $123.79. Things are starting to look up for Netflix, but the question is, can this momentum continue in face of rising costs and pressure from the like of Amazon (AMZN) and Apple (AAPL).
JP Morgan Chase (JPM)
Whenever discretionary spending and interest rates are a part of the market, it has to impact financials such as Bank of America (BAC) and JP Morgan. The latter has always been considered "the lesser of the evils" amongst the banks. It's been awarded that distinction particularly because of how it managed its credit exposure during the housing bubble. In other words, it hasn't been categorized as a predatory lender to the extent of its peers. On Friday the company reported its fourth quarter earnings and without putting too much spin on it, the results were pretty weak. Its earnings were down 23 percent compared with the same period of a year earlier.
The company said that it was hurt by a fourth-quarter slump in investment banking as well as other Wall Street businesses, which suffered amid the sluggish economic recovery. Another factor were the concerns surrounding the European debt situation. On the bright side, the bank showed tremendous growth in corporate loans. The commercial banking unit's profits rose to $643 million, a 21 percent increase from the previous year, as lending to corporations grew for the sixth consecutive quarter. So where does that put the bank amongst its peers and where is it heading going forward? These are the important questions to consider.
The way I look at it, there were no surprises in the report and nothing was revealed to suggest that the company is in better or worse shape than before. The bank will continue to be highly regarded relative to its peers. And as it works to resolve its problems and shows that it can execute effectively, it will stand out as one of the (if not the) best banks within the sector. Today, that may not be saying a whole lot, but the sector will rebound eventually and JP Morgan has the potential as well as the management structure to outperform.
Micron is one to consider at this level. Its story is like many other tech and chip stocks that have fallen on hard times due in large part to macro events. Micron has been beaten up for most of the year 2011 and it didn't help that it recently reported disappointing earnings results and missed expectations that were already "average" at best.
It appears that the fortunes of the company are clearly starting to change in 2012 for a couple of reasons - the first of which being (as mentioned previously) an increase in consumer spending. Micron has tried (unsuccessfully) over the past several years to transform itself from being a commodity-focused memory chip company. The sector in which it operates has been in a downward trend. But I have to think that its shares have become so depressed that it deserves a long look from investors willing to bet on a rebound in chips. For all of the consumer electronics headwinds, the fact remains that Micron is still one of the stronger players, and demand will rebound eventually.