The markets are down today and have reversed the gains from Wednesday. The high-multiple stocks and the Nasdaq are getting hit worse than the S&P 500 and the Dow Jones Industrial Average, and growth is underperforming value, as has been the case for the last month.
There really isn't any new news today. If anything, and as we wrote yesterday, the Federal Open Market Committee commentary made us more constructive and removed uncertainty about the direction of monetary policy. In a nutshell, the Federal Reserve will remain data dependent on the U.S. economy and act accordingly in a measured way. Quantitative easing will continue to be tapered back, but interest rates won't rise materially until 2015 or later, unless the U.S. economy and/or inflation pick up meaningfully.
We still believe the U.S. economy is in recovery mode. Institute for Supply Management reports, purchasing managers' indices, auto sales, housing, aerospace, trucks, construction and the consumer have all shown signs of improvement, and this should lead to better earnings and sales growth, and possibly earnings mulitples. It won't happen overnight, but we expect it to happen.
Are stocks discounting this already? Partly, but we will get more answers from first-quarter earnings season. JPMorgan (JPM) and Wells Fargo (WFM) will report tomorrow and will be very important barometers for the markets. If anything, the weakness in stocks is lowering expectations into earnings, so the risk/reward is getting more favorable. The S&P 500 trades at 15x forward earnings estimates and carries a 2% yield, which is fair value, but we expect earnings to improve as the economy does, and that should lift stocks over time.
We have a cyclical bias in Action Alerts PLUS, but we also own a diversified basket of stocks and sectors, some defensive and some with higher beta. As we wrote yesterday, Alcoa's (AA) CEO was upbeat about several themes we've been playing, and we continue to like several stocks to play them. Aerospace has increased growth rates. Autos and trucks show an improving North American seasonally adjusted annual rate (SAAR) and lean inventories, and higher growth is expected in Class 8 trucks. In building and construction, non-residential construction contracts rose 12.5% in the quarter.
We own and like and would add to Cummins (CMI) , Eaton (ETN) and Johnson Controls (JCI) if they come down further. We are restricted in General Motors (GM) but would be adding to this one, since we believe much of the worst case is factored into the stock. Today it announced a $1.3 billion charge to account for the recall repairs, which included the previously announced $750 million charge for the recalls. Once the company gets out of the spotlight, we believe it can work higher, and we'll remain patient for the longer term.
We would be adding to some other stocks today, but we are restricted in all of them (17 names to be exact). Costco (COST) reported stronger-than-expected March same- store sales. Whole Foods (WFM) is down after Wal-Mart announced its entry into natural/organic foods, a move that we believe Whole Foods' stock is already reflecting, having fallen 23% from highs. Chevron (CVX) had a disappointing interim first-quarter report -- this is a longer-term play on production improvement after years of heavy investment, and the stock carries a strong 3.4% yield. Google GOOGL has been thrown out with "high-beta tech," yet it trades at an attractive 20x forward multiple for 25%-30% growth. PVH (PVH) has leverage and synergies coming from the Warnaco deal. Nike (NKE) has declined 10% since it reported what we viewed as a very strong quarter.
We're sitting tight on the financials, after trimming KeyCorp (KEY) and JPMorgan (JPM) yesterday. We like the long-term stories in all of our banks and financials, but since the 10-year is at 2.6%, they will likely be in a trading range in the near term. Again, JPMorgan and Wells Fargo will be very important calls tomorrow. Finally, we own three stocks that are in the crosshairs of "high beta" selling -- Facebook FB, ServiceNow (NOW) and Celgene (CELG) -- and we've been slowly picking at each position, deliberately keeping Facebook and ServiceNow small, given their speculative nature.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long JPM, CMI, ETN, JCI, WFM, CVX, GOOGL, PVH, NKE, KEY, FB, NOW and CELG.