The Enterprising Investor’s Guide 7-12-2010

The price-to-peak earnings multiple advanced to 12.1x after last week’s strong four-day advance.  The holiday shortened week was a great one for the US stock market as the S&P 500 rebounded about 5.4% after a painful two week stretch that preceded Independence Day.  The bullish tone of the market last week was interesting especially as there really was little news or data released that would prompt such vigorous buying.  In fact, macroeconomic data was tilted towards the negative in our opinion as consumer credit contracted rapidly, initial jobless claims remained elevated at 454k, ECRI Weekly Leading Index weakened further, and retail sales results were mixed at best.  Even still the market rose each day last week, suggesting traders and investors believe the market is oversold after the recent correction.  However, volume was sluggish last week as summer vacations pull attention away from the markets, so last week’s gains while impressive lacked conviction.

There was very little in the way of corporate earnings releases last week as second quarter earnings season officially kicks off this week with Alcoa (AA) after the close Monday with many other notable bellwethers to follow.  As an analyst this is an exciting time as we anxiously await taking the pulse of corporations and how they see the future.  As we already know, earnings have bounced strongly from this time a year ago; in fact, trailing twelve month reported earnings have grown 179% since this time last year to $66.09 per share.  As US corporations have shown nice earnings growth, so too have analyst’s expectations.  Our expectation is that many companies will continue to report fairly strong results, as cost structures remain trimmed down, but they may also start to signal to the market to slow down growth projections for the rest of the year.

The percentage of NYSE stocks trading above their 30-week moving average now stands at just over one-quarter.  There has been a clear reversal in investor sentiment since the market reached its recent peak in mid-April, as investors’ tolerance for risk seems to have evaporated.  We cannot blame investors confronted with the first market correction in nearly a year and a half, and surely many of these same investors are still reeling from the rapid declines of the credit crisis.  While we make no predictions about the near term direction of the stock market, we remain convinced that high quality stocks are more attractive than speculative, potential high-fliers at this time.  There should be renewed interest in more defensively natured stocks that have steady cash flow and attractive dividend yields.  Among our picks in the current market climate; stocks like Verizon (VZ), Pfizer (PFE) and MLPs such as Enterprise Transfer Partners (ETP) fit the bill nicely.

As the market embarks on second quarter earnings, we expect to learn a lot more about the mentality of corporate leaders in America.  To reiterate what we said earlier, we expect financial performance to continue to show improvement as the companies are operating on a leaner framework which helps boost profits at a faster rate than sales.  That being said, US economy has shown some frailty of late that may make many company executives concerned about the aggressive growth targets that analysts are setting for them.  Particularly interesting to us will be the comments of financial companies in regards to financial regulatory reform currently on the docket in Washington.  We may see some of the more cautious executives attempt to reign in the analysts in order to more appropriately manage expectations.  If that is the case, we could see the market move sideways or even sell-off slightly on the tamped down bullishness.

Read the original story at Ockham Research