Did Bond Traders Blink First?

Includes: ACTG, ESL, PPC, WD
by: David Brown

Returning to last week's thesis, which was that if the plethora of economic reports last week were good to okay, S&P support levels would hold and the market rise on the flow of funds from recent long bond sellers. I do think this indeed happened.

Why? Here are several supporting reasons:

1. The economic numbers were better than expected through most of the releases. Several, like consumer confidence and durable goods were quite bullish. None was awful. Housing data was solid. GDP not so solid but not awful. Personal Income was good; personal spending not so good. Chicago PMI down a bit worse than expected but the Michigan sentiment final reading for June was very good.

Then the ISM index was better than expected and construction spending, as expected. Factory orders will come tomorrow and are expected to be better than last month. The payroll report, usually a market moving report, will come on Friday of a four-day holiday weekend. Expect light trading that could cause a volatile market on Friday if the news is really bad, although that is not expected.

2. Support did hold last Tuesday, and the market rose a little more than 3% for the following five trading days (through today). Four of the five days were clearly bullish, with only Friday breaking a five-day bull run. True, volume was typical light summer trading, but the S&P 500 support level near 1600 held for the second time and we aren't that far from challenging all-time highs again.

3. The key is which sectors advanced the most. They were Telecom and Utilities, with Financials tied with Consumer Cyclicals for third. Energy was fifth in line. What do the first three of these sectors and Energy have in common? They are traditionally good dividend payers. It would not require a financial genius to build a portfolio that would yield about 4% from those sectors.

4. In every cap -- small, mid and large -- value did much better than growth. Again, this is the province of the conservative investor compared to the growth-over-value scenario that prevailed most of this quarter. Of the caps, mid-cap did the best, as mid-caps and small-caps continue to draw the most interest from active investors.

It just makes sense that the large outflow of money from bond funds is finding its way into the equity market. Therefore, we would expect good performance from stocks with dividend yields and, perhaps even better, very strong quarters short term with conservative valuations. In recent weeks, we have provided a number of strong dividend stocks -- Seagate Technology (NASDAQ:STX), ConocoPhillips (COP), Homeowners Choice, Inc. (HCI), Macy's (NYSE:M) and Thoratec Corporation (THOR), to name a few. Today, we concentrated on stocks that are projected to have very strong earnings this quarter and the next few quarters. We also screened for stocks with very reasonable valuations that would be attractive to former bondholders trying to regain strong total-return portfolios. Below are four stock ideas for this holiday-shortened week.

Have a great Fourth of July holiday!

4 Stock Ideas for this Market

These four stocks have high expected earnings growth in the near term, with low forward P/E ratios.

Acacia Research Corporation (NASDAQ:ACTG)

  • Acquires, develops, licenses, and enforces patented technologies in the U.S. and manages patents for very large companies
  • Expected earnings growth next quarter: 229.40%
  • Expected earnings growth per year for next 5 years: 20.00%
  • Forward P/E ratio: 7.84
  • 2.2% dividend yield

Pilgrim's Pride Corporation (NYSE:PPC)

  • Operates chicken processing plants and prepared-foods facilities in 12 states, Puerto Rico and Mexico
  • Market has focused a lot of attention on food industry since Smithfield was purchased by Chinese group for $4.7 B.
  • Expected earnings growth current quarter: 88.90%
  • Expected earnings growth next quarter: 166.70%
  • Expected earnings growth this year: 130.10%
  • Forward P/E ratio: 9.75

Esterline Technologies Corp. (NYSE:ESL)

  • Designs, manufactures, and markets engineered products and systems for aerospace and defense customers
  • Expected earnings growth current quarter: 36.60%
  • Expected earnings growth per year for next 5 years: 15.00%
  • Forward P/E ratio: 12.41
  • Dividend yield 1.59%

Walker & Dunlop, Inc. (NYSE:WD)

  • Originates, sells, and services a range of multifamily properties; and offers a range of commercial real estate finance products
  • Expected earnings growth current quarter: 40.50%
  • Expected earnings growth this year: 15.70%
  • Forward P/E ratio: 7.61

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.