To put it bluntly, the market we are dealing with right now is a slow and boring one. News is light, earnings are mainly behind us, and central bankers aren't meeting at the break-neck pace they were in June and July.
This has made for a dull, low-volume trading environment that can be treacherous on traders. Volatility has simply dried up. When this happens, traders can have a tendency to over-think and force the action, which more times than not, does not work out well.
It is my expectation that this down-period will be short-lived, however. There are a few highly anticipated events on the horizon that will spark a more pronounced move in the market:
- Fed Chairman Ben Bernanke's economic conference in Jackson Hole, WY on August 31
- The ECB's Governing Council meeting on September 9
- The upcoming Presidential debates on October 3, October 16, and October 22
- Increasing skittishness over the "fiscal cliff" as Congress sits on their hands.
Given the prospects for heightened volatility in the near future, combined with the low historical cost of picking up shares of the iPath S&P 500 VIX Short Term Futures ETN (VXX), I feel that could be a profitable trade worth exploring. But, from an overall portfolio strategy standpoint, I have been using this lull to add stable, dividend paying stocks. It is my opinion that the stock market is dangerously complacent, and that the underlying risks are still immense. Here are a few stocks that I do feel more comfortable holding:
Break-Up Potential + Restructuring + Yield = Winning Combo
In an attempt to unlock value for shareholders, global food behemoths like Kraft (KFT) and Dean Foods (DF) have recently announced that they are spinning-off parts of their businesses. Both stocks have reacted in a decidedly positive manner.
It has long been rumored that PepsiCo (PEP) may ultimately go down a similar path by shedding its Frito Lays snacks unit. This possibility gained steam when it was disclosed that Ralph Whitworth's Relational Investors has built up a $609 million stake in the company. The activist firm has credentials when it comes to corporate shake-ups and PEP confirmed that it has had discussions with the firm regarding a potential break-up. At this point, at least publicly, PEP has been steadfast in its plans to keep the company together. For what it's worth, UBS has said that PEP is worth ~$82/share in such a scenario.
While a split of PEP could be a boon for investors, it is not the only reason to own the stock. In February, it announced a number of restructuring procedures that are now paying big dividends. Namely, it's consolidating some warehousing and sales facilities and streamlining is management. PEP is on pace to deliver $1 billion in productivity savings this year, and is targeting another $2 billion over the next three years.
Lastly, PEP has a 3% dividend yield. With earnings growth rates essentially at nil, investors continue to gravitate towards higher-yielding names. This should help keep PEP shares in demand.
If you are living in a "swing state", and if your TV is on right now, chances are you are viewing a political ad. It is expected that political ad spending will reach an astronomical $2.9 billion this year, blowing out the $515 million that was spent in the 2008 presidential cycle.
While the general public may be ready to pull their hair out at the sight of another political ad, TV and media companies certainly don't mind.
One such company that is bound to benefit from the onslaught of ads is News Corp (NWSA), which owns the Fox News Channel. During the company's latest quarterly earnings report, it commented that a strong political advertising market heading into the November election will boost its television segment.
NWSA has a couple other catalysts to consider as well. Back in late June, it announced that it will split itself into two businesses: Publishing & Entertainment. The move was celebrated by investors as the stock popped by 8% that day (and continues to move higher). The split was viewed positively because it separates the low-growth, low-margin publishing business from the higher-growth, higher margin entertainment business, which includes assets like 20th Century Fox and Fox News Channel.
Another interesting item is that management still views shares as undervalued - even after its recent run. During its earnings conference call on August 8, it said that its' "under-value stock continues to support our buyback plans." Note: NWSA increased its buyback program by $5 billion in April, for a total of $10 billion.
An Earnings Machine
A stock with zero revenue growth doesn't get the heart palpitating. A company with zero revenue growth but 14% earnings growth is a bit of an enigma. Such is the case with IBM (IBM), which just continues to churn out solid earnings despite a completely stagnant top line.
Whether you want to characterize it as "smoke-and-mirrors" or solid management execution, the bottom line is, Big Blue's bottom line continues to grow. Over the past four quarters, its EPS has increased by: 14% in 2Q12; 15% in 1Q12; 13% in 4Q11; and 16%. Certainly not spectacular, and maybe "boring" even, but consistent and predictable nonetheless.
So, how has IBM been doing it? Modest improvements in gross margin (47.6% in 2Q12 vs. 46.4% year ago) as revenue from its Technology and Global Services segments grow faster than corporate average, share buybacks, and solid cost containment.
IBM is also looking interesting from a technical perspective as it recently broke through the upper-end of its downward channel. It is also currently pushing through a key resistance level at the $200 level.