Shopping For Blue Chips
Halfway through the fourth quarter and investors nervously anticipate both the Federal Reserve meeting in mid-December and the critical retail shopping season. Stock prices are reacting selectively to company news rather than as sectors.
Macy’s (M-$40), which owns Bloomingdale’s, reported its third straight quarterly sales decline for its latest quarter and its stock dipped sharply as the company slashed its forecast for the fourth quarter. The company tried to blame this disappointment on tepid spending by domestic customers, continuing lower sales to international customers due to the stronger dollar, Internet competition and even the weather (too warm).
Macy’s badly needs new managers or another Miracle on 34th Street as it lost market share even to J.C. Penney and, of course, to Amazon, whose sales were up 16% in October. It’s not alone as Wal-Mart also cut its forecasts, blaming higher wages [?] and online competition, sending its stock into its worst one-day drop in 25 years.
These disappointing reports caused sympathetic dips in our two discounters, TJX (TJX-$68), operator of T J Maxx, and Costco (COST-$156). Both are indicating moderately higher same-store sales and have new earnings reports coming over the next two weeks. Simon Property Group (SPG-$191), the large REIT that operates malls, also dipped and now yields 3.3%. All three are buys. Amazon (AMZN-$668) would be, were it not for its sky-high valuation over 100 times next year’s forecast earnings.
A similar valuation keeps out Palo Alto Networks (PANW-$155), a leader in the vital sector of computer security. It would be an attractive buy below $140. I recommend Qualsys (QLYS-$37, another leader with its focus on security on the “cloud,” a growing subsector with its new designation as “vulnerability management.” (VM)
The company recently forecast sales around $164 million, up 23% from last year, similar to its 24% rise recorded in 2014. 3Q earnings were up 27% and analysts’ estimate $.67 for 2015, up 45% from $.46. It expects a robust 4Q with an increased marketing and the impending departure of competitor Intel from the VM subsector.
Current uncertainties about retail sales, housing starts and the familiar worrying about the next Fed action are jangling investor nerves. These uncertainties will be resolved as we move toward December and a year-end rally. Meanwhile, some larger favorites are experiencing modest pre-holiday markdowns.
Disney (DIS-$116) sold off last summer when investors overreacted to a decline in ESPN subscribers. Then, it reported quarterly sales up 7% to a record $52 billion with earnings up 15%. Now, we await the opening of Star Wars: The Force Awakens, which is already selling toys, collectibles and much more. Its CEO said that demand for these “will only grow with the release of the new movies.”
Note the plural. The forthcoming release on December 18 is the beginning of a new trilogy and the forthcoming quarter the beginning of a multiyear event. The P/E is 23, reasonable for virtually assured double-digit growth, the dividend 1.1% and the Force is with Disney.
Disney is an example of the sturdy blue chip stock that should make up the backbone of almost all stock holdings. Apple (AAPL-$116) is another. Its stock price tends to sag between earnings announcements as spreadsheet drones try to get media attention by publishing negative forecasts on prominent stocks. Smart investors use any resulting price dips to add to positions.
Other large industrial companies with stocks in buying ranges include Boeing (BA-$142) and Honeywell (HON-$101). General Electric (GE-$30) showed direction by climbing above $30 for the first time in seven years. Amgen (AMGN-$155), the most solid biotech, handily crushed estimates for quarterly earnings. The company is forecasting around $9.50 for 2015, a very attractive valuation for an advanced sector leader. Yield is two percent with increases for three straight years.
The market’s uptrend is intact but coming under pressure. Such times favor sticking with proven blue chip stocks.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
