May, 2014 (Chinavestor) The month of April brought little surprise to investors. The Dow Jones Industrial Average (INDEXDJX:.DJI) advanced 0.7% and closed at another record. The index is up 0.8% YTD. Technology stocks disappointed dragging down the broader NASDAQ composite –2.0% for the month. The index is –0.7% in the red for the year.
Chinese stocks continued April where they left off the first quarter. The Hang Seng Index (INDEXHANGSENG:.HSI) fell –0.1% for the month but there is a lot more behind the numbers. The index rose 3.2% all the way to the 23,200 level in the first ten days of April but eroded all those gains and more by the end of the month. Slower GDP growth in China is primarily responsible for the weakness. China reported 7.4% GDP growth for the first quarter, a clear cool-off from the average 10% plus growth for the past two decades. The Hang Seng Index is off 5.2% YTD, basically in-line with the Shanghai Composite Index (SHA:000001). US listed Chinese stocks continue to suffer from lack of interest and weak market sentiment. Chinese technology stocks got hammered on the back of the broad tech sell off. The China ADR Index, compiled by Chinavestor, fell 1.5% for the month and is –6.6% in the red YTD.
We don’t expect much of a change going forward into May. Chinese equities, especially those listed on the NYSE and the NASDAQ, are going to suffer and US indexes may continue to outperform the rest of the world.
There is a clear resilience how US equities have shrugged off the ever shrinking FED bond purchase. The market did hardly move this week following news that the FED would cut back monthly bond purchases by another $10 billion. The program is now buying $45 billion long-term bonds a month, down from the $85a month clip earlier the year. This is a significant decline of such quantitative easing, from $1 trillion a year down to $500 billion. Interestingly, the stock market hasn’t budged…
The US economy continues to be a reason of concern. There has been some healing in the past, especially in the housing and the jobs market. U.S. home prices have increased over 12% for the last 12 months but the clip of increase has all but eroded by April. Housing stats show virtually no price increase for the last two months. And a not so good news from the sector. Single family home sales fell 14.5% in March, highlighting the fact that there is a lot more healing to be done in the sector.
The jobs market is also a mixed bag. The US economy created 220,000 new private jobs in the month of April, a significant increase from the previous three months for 2014. Yet the pace of advance is just in-line with the overall jobs creation we have witnessed following the 2008-2009 melt down. As a matter of fact, the 200,000 new jobs monthly clip on average for the last three and a half years were just enough to make up for most of the losses we suffered in the 2008-2009 period. The chart on this page clearly describes dynamic on the jobs market for the past 8 years. All told, the US economy is back to where it was at the end of 2007 as far as jobs are concerned; but not quite. Unemployment remains higher than in 2007 due to the overall increase of the work force during the examined period.
Another not so good news is that initial jobless claims continue to rise. The number just hit 334,000 this week, a nine month high.
Then we have other factors to consider when it comes to the US economy. Consumer confidence slipped in April though it did so from a record high level in March. Considering that consumer spending is primarily responsible for economic growth, consumer behavior is an important ingredient concerning future growth. Good news is that consumer spending just registered the biggest increase since 2009.
Assuming that corporate earrings drive stock prices ultimately, we have two stocks in focus this month. The first one is Whiting Petroleum (NYSE:WLL), and through this stock we will take a look at the whole shale oil industry. Then we will take a look at Apple Inc. (NASDAQ:AAPL) and the broader technology sector as well.
Whiting Petroleum (NYSE:WLL) has just reported earnings. While the company beat analyst estimates for both revenues and earnings, it is still early to tell where the company is heading from here.
The biggest concern going forward is lack of profit growth. Whiting Petroleum (NYSE:WLL) reported revenues of $721 million, up from $605 million a year ago and net income rose to $109 million from $86.2 million same period last year, the increase is impressive only on a year-over-year comparison. Considering that Whiting Petroleum (NYSE:WLL) reported quarterly profits of over $200 million twice in 2013, a $109 million profit is less than convincing. Lack of constant bottom line growth is clearly evidenced on the first chart of the page. Red line represents EPS growth. There is one plus for WLL though. The company is trading at 24 times earnings, a 50% discount compared to larger rival Continental Resources (NYSE:CLR). CLR is going to report earnings on May 7th. The two dominant players will help us get better understanding of future growth for the sector. Right now WLL is a potential buy in a dip only.
Another stock we pay close attention to is Apple Inc. (NASDAQ:AAPL). The company beat estimates and surged right after earnings. Given the magnitude of the advance, it will take time for technical indicators to digest the big move and catch up. For this reason we omit the usual overbought/oversold screen but picked another one looking for trends. Based on the chart on the previous page, Apple Inc. (NASDAQ:AAPL) may reach $620 before hitting a new resistance level. Besides technical indicators, Apple has very solid fundamentals and just as importantly, is trading at modest valuations! Apple Inc. (NASDAQ:AAPL) was trading 13.2 times earnings before earnings announcement instilled rally. The stock advanced $70 from $525 to $595 in three trading days, lifting P/E to a still modest 14.1. That’s still below that of Microsoft and Cisco Systems (CSCO). Additionally, AAPL has a dividend yield of 2.22%, in-line with IBM, Cisco Systems (CSCO) and Microsoft (MSFT).
Given that Apple is trading at lower price multiples than CSCO or MSFT yet delivered higher top/bottom line growth, AAPL is our favorite among growth stocks.
We continue to like IBM Corp. (NYSE:IBM). While current first quarter was less than convincing, IBM has a strong dividend payout ratio as well as an ambitious share buyback program. This sets IBM apart from CSCO and MSFT.
Finally, we continue to keep an eye on Chinese equities. One of the most interesting developments has been lack of price appreciation of Chinese stocks globally, yet corporate profits have been growing strong since 2010. This creates opportunity for the risky investor. Chinese equities have been trading at multi year lows and some argue that there is a rare opportunity to buy into Chinese stocks at a discount.
Going with ETFs is one way to mitigate risk. Morgan Stanley China A Share Fund (NYSE:CAF) and iShares FTSE/Xinhua China 25 Index (NYSE:FXI) are our suggestion for those willing to take a risk. Wish you successful investing, Blaze Fabry.