Greek Deal Presents Opportunity For Profit-Taking

Includes: AMAT, CPB, JCI, SOHU
by: Efficient Alpha

By Joseph Hogue, CFA

The overseas markets are cheering Greece's approval of austerity measures with 0.4 percent on the MSCI Asia Pacific Index and gains to the euro. While the measures will ensure the country's receipt of another $173 billion from the EU, this will almost certainly not be the end to the region's credit problems. Further headline risks out of Europe, combined with the wrap-up of 4th quarter earnings in a couple of weeks, may take some of the upward momentum out of the markets' recent rally.

The U.S. markets were basically flat last week with a drop Friday wiping out previous gains and volume relatively lighter than during previous years. While the markets welcomed the generally positive economic news out of the U.S., some were calling for profit-taking of the 5 percent run in the S&P500 year-to-date and 22 percent gain since October's low.

A reduction in weekly first-time jobless claims to 358k and improvement in the Job Openings and Labor Turnover Survey was the highpoint of a light economic week. Weekly claims have now been under the 400k threshold for 12 of the last 14 weeks and the labor market is showing signs of improvement.

Consumer credit also increased strongly in December by $19.3 billion reflecting increases in credit cards, student loans and car loans. The lack of real wage growth and the lower bound in the savings rate may act as a headwind to further strength in the credit card segment, but other areas of non-revolving credit should continue to do well.

More Good News in the U.S.

The retail sales release is due out on Tuesday and expectations are for a 0.7% increase from last month. This would be a welcome rebound from December's disappointing 0.1% increase. The risk to the report is to an upside surprise on unseasonably warm weather through much of the country. The weather may cause problems for some apparel companies as heavy coats and clothing sit on the shelves. The apparel sector is currently trading around 21 times trailing earnings, so may see weakness if sales disappoint. The auto & truck parts segment may do relatively better and is priced cheaper at 11.6 times trailing earnings.

Johnson Controls (NYSE:JCI) provides a range of products to the automotive sector including interiors and batteries. Shares pay a dividend yield of 2.2% and trade at 13.7 times trailing earnings. The company's strong diversification of sales to different regions and customers gives it the advantage over smaller players in the space.

The report on industrial production on Wednesday should show continued improvement as well. Manufacturing has been supportive to growth over the last year and January's number could show an increase of around 0.7% on a month-over-month basis. Utilities will probably have been negatively affected by warmer weather, but other components should do well.

The CPI report on Friday may come in higher after November and December's relatively tame readings. Consensus is for an uptick of about 0.3% overall with core prices higher by about 0.2% during the month. While this is fairly high, most economists are calling for some moderation throughout the year to around 3.0% annually.

Earnings Generally Strong, but Outlook Weak

Earnings for the 290 S&P500 firms reported so far have shown decent growth at 5.6% but net margins are down slightly. Many are calling for margins to continue their slide in coming quarters as companies run out of cost savings but still have trouble ramping up sales.

Though economic data out of the U.S. is picking up, Europe is clearly heading back into a recession and the emerging world is showing signs of slowing. Chinese internet company Sohu (NASDAQ:SOHU) fell 15 percent on its first quarter outlook last week as a slowdown in the Chinese economy translates to lower advertising revenues. The soft outlook comes as the country's Premier Wen Jiabao talks of "fine-tuning" economic policies in the coming quarter and the IMF warns that China's growth could be halved on further weakness in Europe.

With 40% of earnings for S&P500 companies from overseas, this is not good news for the coming quarter. Of that 40%, Europe represents about 15% of total earnings for S&P500 companies. Stocks are trading for about 14.1 times trailing earnings, still below their long-run average of 16 times but well above the cheaper days of last October.

Applied Materials (NASDAQ:AMAT) reports earnings after the market close on Thursday and is expected to show weak income of only $0.12 per share versus a gain of $0.36 during the same period last year. This is while competitor Intel (NASDAQ:INTC) improved earnings by 8.5% over last year's quarter. Shares are relatively cheap at 8.9 times trailing earnings and pay a 2.47% dividend yield.

Campbell Soup (NYSE:CPB) is set to report earnings before market open on Friday with expectations for $0.62 versus $0.71 during the same quarter last year. Revenues have been week over the last few quarters and the company has had to spend more on branding to keep customer loyalty during the recession. Though limited upside exists, the shares pay a healthy 3.7% dividend yield for those willing to wait.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.