Stock of the Week


October 2nd 2017

2017 has been pretty easy so far for the bulls with the S&P 500 up 13% year to date with very little volatility. The corrections since the election last year have been limited to just 3% pullbacks. There are a number of reasons for the strength of the rally and lack of volatility. First, our economy continues to improve, trying to get to 3% GDP growth. Second, we have a very pro-business President that wants to allow companies to grow and limit or reduce regulations for many industries. Banks and the financials, the life blood of the economy, could be the main beneficiaries. If the banks are allowed to loan out money more freely, industries will have greater opportunity to grow. The third reason for the markets strength has been a resurgence in Emerging markets and even the European economies.

September is statistically a bad month for the markets, but we just finished the month at new all-time highs. In the last 90 years, a rally to new highs in September has happened 29 times. In those years, 80% of the time the averages finished higher by year end with returns in the range of 3.7% to 5.9%. So if the averages are going higher in the fourth quarter, where should people invest?

Year to date, the best place to invest has been tech. Apple, Microsoft, Google, Amazon, and Facebook are now the five largest S&P 500 companies with a combined market cap of $3 trillion. Of these five, Amazon and Facebook may be ahead of themselves, but tech will continue to perform well.

Apple's (AAPL) sales and earnings are about to accelerate thanks to the iphone 8, the iphone X, and a new watch. Earnings are projected to grow 22% while sales will grow 16%. Cash flow will only improve as the company will generate an additional $40 billion $50 billion in free cash flow a year.  Apple's stock trades for 14 times earnings and analysts have the stock going to $180 to $200 a share.

The chips space also remains hot in the tech sector. Nvidia (NVDA) has been on fire, but is very expensive. A chip stock that is not expensive based on recent better than expected earnings is Micron Tech (MU). The rise of cloud computing, artificial intelligence, and augmented and virtual reality applications has spurred stronger demand for dynamic random-access memory, or DRAM chips. Micron trades for 5 times earnings and 1.8 times sales. The downside is the business is very cyclical.

Going forward, many mutual fund companies predict the Emerging markets and other parts of the world will continue to outperform the US similar to this year. Investing or diversifying into Asia and International funds and UITS may be a good place to be in the next five to 10 years.

The fourth quarter may also be kind to value stocks. Amazon and Tesla have performed well this year, but the rest of the retail space like Macy's (M), Dicks Sporting Goods (DKS), Ford (F) and GM (GM) trade as if they are going out of business. All these companies remain very profitable, trading for less than 10 times earnings, less than one times sales and sport great dividends. It won't take much good news to produce 10%, 20% or 30% returns in these value stocks.

In the coming weeks we'll have third quarter earnings and fourth quarter guidance so news names and stocks should present themselves for a year-end rally.