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Eugene Eliot Narrett was born on December 27, 1948. He died on the night of December 6, 2013. Having just left an art gallery in Brattleboro, Vermont, where his paintings were on display, he crossed Union Street and was struck by a hit and run driver. Professor Narrett was the first of five sons... More
  • Stocks That Stood Tall At The End Of 3 Turbulent Days 0 comments
    Sep 25, 2013 7:16 AM | about stocks: BA, CAT, CVX, HSBC, BLK, RIO, WFM, MCD, DE, BNS, MMM, GE, BP, VHT, VALE, WMT

    The markets have had a remarkable and unsettling few days in the context of a far longer and ongoing time of stormy weather. The Fed is continuing its $85 billion / month purchases of Treasury debt and MBS. However and as we have come to expect, the policy comes with a chorus of conflicting messages, e.g. the need and / or ability to taper because the economy is recovering and there is low inflation despite QE. That sadly is not true: William Dudley of the NY Fed and Dennis Lockhart of Atlanta are correct that there is "no pick up in forward momentum" in economy that "is still weak" but the mixed messages, like Fed interventionism plays havoc with markets.

    It is clear that rising yields were crippling the housing market and badly damaging the nominal value of bond holdings. The power of the Fed in socio-economics has been shown in its muscling down yields from 3% to 2.64% in two weeks. I hope readers heeded my suggestion not to sell out their bond holdings when prices were depressed. The mix of economic weakness and fiscal intervention makes all-in plays perilous in these times.

    This article will examine stocks that emerged green Monday afternoon from a bizarre three days that began with euphoric ascent Wednesday afternoon at 2pm as the news of continued QE hit, a deep decline that set in shortly after the opening Thursday, and uneasy meandering that continued through Tuesday, September 24.

    In the backwash of contending QE narratives and awareness of persistent economic woe (an "end game for the USD" John Williams writes), several stocks stood tall in September 23's broad-based decline. It is worth taking note of them because the volatility late last week and the uncertainty and malaise this week are a pattern likely to repeat. Let's look at the companies that showed green on the third day of this troubling interlude: they give hints about areas of strength going forward.

    Most of these companies belong to the "Portfolio of Kings" I have been describing in a series of articles in recent weeks. See my archive for detailed discussions of the best companies in media-entertainment, consumer related, basic materials, industrials and PMs (precious metals). Economically and culturally we are in an extended period of fiat economics, politics and law. The surface of society glows with positive narratives and the media's hypnotically breathless pace but beneath the dazzle, social structures are impaired. Investors must identify and own the companies that are out-performing and are likely to continue to outrun price-action that reflects talking points, socio-economic contention and decay.

    Here are the companies that showed green after a three-day roller coaster that saw the S&P pop from 1700 to 1730 in two hours of trading, then fall giddily from 1730 to 1698 before finding its footing to close Monday at 1702, a drop of 2.49% in 3 sessions. Expect the next 4-6 weeks to provide similar swings on a larger scale. After listing those left standing on Monday at 4pm, I offer a chart on their basic metrics and a comment on their prospects.

    Apple (OTC:APPL) +5.02%, Bank of Nova Scotia (NYSE:BNS) +.47%, Boeing (NYSE:BA) +.75%, Caterpillar (NYSE:CAT) +.33%, Chevron (NYSE:CVX) +.42%, Deere (NYSE:DE) + .23%, General Electric (NYSE:GE) +1.33%, HSBC (HBC) +.25%, McDonald's (NYSE:MCD) +.39%, Triple M (NYSE:MMM) +.92%, Royal Bank of Scotland (NYSE:RBS) +.26%, Rio Tinto (NYSE:RIO) +.43%, Vale (NYSE:VALE) +1.55% and Whole Food Markets (NASDAQ:WFM) +.67%.

    After events of the past five years, many investors want nothing to do with financials. That is understandable. However, in my article examining the sector I identified one super major, HBC, and two large-caps, BNS and Blackrock (NYSE:BLK) whose metrics are sound. Note that two of them, HBC and BNS showed their fundamental solidity on the third day of chaotic downward action.

    Here is a chart of basic metrics for these companies. Numbers except for EPS are in USD billions:

    Revenue Debt Cash Flow Growth EPS Yield% Payout%

    APPL

    169

    17

    43.7

    10.7%

    $40.04

    2.6%

    27%

    BNS

    28

    31

    6.2

    3.6%

    $4.97

    4.2%

    47%

    BA

    83

    10

    6.1

    3.4%

    $5.47

    1.7%

    34%

    CAT

    60

    40

    7.2

    -16.6%

    $6.34

    2.8%

    33%

    CVX

    233

    20

    38.1

    -7.9%

    $12.34

    3.2%

    30%

    DE

    38

    34

    35

    7.6%

    $8.72

    2.4%

    22%

    GE

    146

    387

    23.9

    -2.2

    $1.46

    3.2%

    51%

    HBC

    110

    29

    17.6

    -13%

    $4.15

    3.6%

    55%

    MCD

    28

    13

    7.1

    1.7%

    $5.45

    3.3%

    55%

    MMM

    30

    5.95

    5.9

    2.4%

    $6.38

    2.1%

    38%

    RBS

    37

    40

    -5.1

    -8.6%

    -1.03

    0.

    0.

    RIO

    60.5

    30

    -5.8

    -1.45%

    - $1.62

    3.4%

    n/a

    VALE

    47

    30

    6.74

    -4.3%

    $.43

    4.6%

    186%

    WFM

    13

    0.

    .9

    13.1%

    $1.45

    ,7%

    88%

    This list includes giant and large and one mid-cap stock, WFM. It does not include the Health Care and Info-Tech sectors (except APPL) which because of time constraints I follow by ETFs and funds rather than individual issues. My readers know that I believe it is needful to have considerable Health Care including bio-tech exposure and that I believe the stage of socio-economic change we are in favors larger issues. Smaller capitalization may add to the headwinds facing PMs (precious metals) as the acquisition and growth plans of sector cap leader Goldcorp (NYSE:GG) may indicate while far more profitable companies cut costs. Good ways to participate in the Health sector are via Vanguard's ETF (NYSEARCA:VHT) which, like the fund it replicates, favors large pharma and health provider companies, and Fidelity Bio-Tech Select fund (MUTF:FBIOX) which leans more toward mid-large pioneers.

    Eleven of the fourteen stocks in the list are in the portfolio of kings. VALE is an anomaly that is worth watching as it struggles to rise from a 3-year decline and more than a year of serious under-performance among its major mixed commodity mining peers. The good showing of RIO coheres with its strength the past 4 -5 months and the arguments I have presented on the merits of its material, geographical diversity, prospects (including difficult Mongolia) and the top shelf affiliations of its extremely distinguished board. Yet I would not put it, RBS or VALE on the top shelf of the other stocks all of whom boast powerful ROE.

    WFM has $1 billion cash & equivalents and its zero debt and strong 13.1% growth, top of these stocks, should allay concerns about the high payout ratio. It has 14.3% ROE.

    The leaders in ROE among this resilient group are BA at 55.9%, DE 39%, MCD 36.4%, APPL 30.6%, MMM 26.4% and CAT at 24.1%: BA is in a class of its own in this metric. The coverage ratio of debt-free WFM is in effect off the charts and APPL at 961% shows it is among the most profitable companies on the market and undervalued. In its massive revenue / debt and strong cash flow / debt ratios it resembles titans British Petroleum (NYSE:BP) and Wal-Mart (NYSE:WMT), core holdings for a portfolio of kings that did not show green after the tumultuous 3-day period here examined but do not ignore them. APPL is a titan of EPS and its 10.7% growth is remarkable for a super major. Some people are uneasy with the cult nature of its following and the high level of salesmanship in its image and action but the numbers are sound. It is difficult to like the debt ratio of GE but its industry position and world-moving technical skills lead it to be judged by different standards.

    The strength of CVX, CAT, DE, MMM and MCD in profitability measures like EPS, cash and revenue / debt highlights them as companies to weather fiscal and geopolitical gales. Put them high on your list of core holdings. Be strong and take care.

    Disclosure: I am long CAT, WFM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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