The Dow, Housing, Oil and Credit Cards

Dow

Donald Johnson presents data from Morningstar that suggests the Dow Industrials are collectively a "five star stock" given the relative undervaluation of the index. Specifically, he notes the following individual stocks that get the top ranking: 3M (MMM), which closed at 78% of fair value; American Express (AXP), 65%; American International Group (AIG), 49%; Bank of America (BAC), 61%; Citigroup (C), 62%; General Electric (GE), 72%; Home Depot (HD), 64%; Johnson & Johnson (JNJ), 81%; Merck (MRK), 77%; Pfizer (PFE), 63%; and Disney (DIS), 83%.

While I've only discussed a handful of those stocks directly, I tend to agree with most of them. Trying to pin a value on AIG at this point seems like an exercise in black magic, and the same holds true with Citigroup. GE has continued to disappoint, touching a new low today after investors struggle to find enthusiasm for the conglomerate after its financial-related struggles.

Beyond those and the pharmaceuticals, which I generally try to steer clear of – the exception being JNJ, which I'm pretty positive on – I continue to like Home Depot, think Disney at 2x book is a pretty good deal, and am enthusiastic about American Express, where CEO Ken Chenault upped earnings guidance today even in the face of higher credit charges.

It's been argued before that mega-cap companies on the domestic side are inexpensive, and I think this does a pretty good job demonstrating that, even with the dubious valuations done on the financials.

Crude Oil

Crude prices have quickly dropped about $10 bucks since I suggested that maybe things were a little too hot there, at least temporarily. While the supply side of things is always opaque, a combination of hard data and some anecdotal observations are showing that people are actually cutting back on their driving. This is a good thing; even if it doesn't noticeably lower gas prices, at least the roads I drive should be slightly less congested.

Bespoke has a great pair of graphs showing current energy inventories against trailing averages, as well as crude futures pricing against consensus analyst estimates.

Housing
As I mentioned in "Golf Clap for the Homebuilders", a number of those companies are finally getting things right after years of profiting from bubble conditions. Doing so, however, is painful – but even with pretty bad results from Toll Bros. (TOL) and D.R. Horton (DHI) CEO Don Tomnitz giving a candid opinion on the state of a recovery ("I believe the industry will continue to face rising pressures for certainly the next 12 to 18 months… 2010 will be the earliest we get a more solid homebuilding environment.") that most people would have preferred not to hear. The one gem I pulled from the Toll call was that drywall prices are expected to rise in the coming quarter. As someone who owns shares in (and closely follows) building supply maker USG (USG), I was heartened by CEO Robert Toll's mental accounting for the costs of a home that included this tidbit: "Where's drywall? Next quarter up but for the past quarter it was down a couple hundred dollars a house.". There had been some debate as to whether or not the price increases in the wallboard industry were going to stick; if Toll is saying it's happening, I have to believe it's happening.

Credit Cards
As I mentioned above, American Express CEO Ken Chenault announced that strong international growth is going to offset domestic troubles, and even with rising defaults in their loan receivables portfolio, he expects earnings to come in higher than consensus estimates. For what it's worth, my AmEx EPS model for my Investments class last semester is holding up much better than most on the Street; so while I doubt that means my grade will get revised higher, it is the basis for my American Express Stock Report – might as well make some money to offset tuition.

My main point here is that in my article "Reason to be Cautious on Visa, Mastercard" I noted that the expected contraction in credit card lending lines, coupled with the hesitancy of issuing banks to open new accounts, could be enough to crimp the rapid profit growth expected of the pure credit processors. This article on direct mailings for such credit seems to confirm that is at least a possibility; estimates put credit card mailings down 14% in the first quarter with one interesting caveat – the decline seems to be concentrated in those same pure play processors, as American Express and Discover both increased the number of mailings. A move to steal share as Visa (V) and Mastercard (MA) have the less-than-full backing of its issuing banks?

Disclosure: I own USG, but nothing else mentioned here.

Comments

[jigs]

"Crude prices have quickly dropped about $10 bucks since I suggested that maybe things were a little too hot there"

Good Morning !

[James Cullen]

Sorry, I posted this on my site about two days earlier - thought Bespoke's graphs showed an interesting divergence between price and usage.

[truthinvesting]

Nice article